What is a right of first refusal?

I’ve found that a lot of people, including some realtors, aren’t quite sure what a right of first refusal means on a property.

It is a contractual arrangement between a prospective buyer and a seller that gives the buyer first dibs on buying the seller’s home. It’s usually negotiated when the buyer wants to sell their house before buying the new one and the seller wants to make sure they can continue to look for another buyer in the meantime, just in case they don’t.

While the buyer is trying to sell their home, the seller is still marketing the property and may get another offer. The seller has to notify the first buyer of that second offer within whatever time frame has been agreed to. Then the first buyer has a certain time period (usually 24 or 48 hours) to make up their mind whether to buy the property on the terms agreed to or let it go.

In a hot market, we don’t see these agreements very often. For one thing, the right of first refusal can deter agents from showing the property and clients from seeing it — no one wants to fall in love with a property  and then find out that they may not be able to get it.

Up until about a year ago, a right of refusal on a property showed up on MLX on the listing as if the property had conditionally sold. That was nearly fatal to the seller’s ongoing marketing attempts, and unfair to the seller. After all, the essence of the agreement is that the seller can continue marketing their home and looking for that second offer while the buyer tries to sell their own. But the rules have now changed.

A right of first refusal now shows up on the  MLS (our MLX)  listing as a “Y” (for yes) next to a section that asks if there’s a right of first refusal or not. It’s easy to miss, believe me.

I’ve made arrangements on occasion to show properties to clients, only to have the listing agent contact me later to let me know there is a right of first refusal. Sometimes they indicate that the condition is about to expire; there is always a date by which the buyer has to either sell or there’s no deal at all.

Since the right of first refusal tends to deter some buyers, you  are probably wondering why a seller would agree to it. There are two reasons: first,  if the buyer can sell their home successfully, the seller has a sale: remember, all the other terms of sale have been negotiated too. (The deal also usually specifies the address of the home being sold and when it will be listed so that the seller has some confidence that the buyer is serious.)

Secondly, having a buyer in hand gives the seller negotiating power if a second buyer comes along — they know exactly what the first buyer was willing to pay. As I learned at Harvard when I took negotiations, you can always negotiate a better deal if you already have one in your back pocket.

In a slow market, like the one in Ottawa — it’s now taking properties around 57 days on average to sell — we are seeing more and more of these agreements. The terms are always confidential: the second prospective buyer will never know how much the first buyer agreed to pay.

Generally speaking, though, if a buyer wants to tie up a seller’s property for a month or two while they sell, they can expect to pay a premium. The last time I negotiated a first refusal on behalf of buyers, for example, we came in slightly over asking. There was no way the sellers would have agreed otherwise, and no way my clients were prepared to take the risk of buying a house, even one they loved,  unless they were certain they could sell their  home first.

So if you see a home on the market that is subject to a right of first refusal, keep those factors in mind. If you are thinking of making an offer on such a property, it’s a little bit like any other multiple offer situation — be prepared to make your best offer, and even then, be prepared for the chance that the first buyer may get the property despite your best efforts.

If you’re the seller, and you are being asked to agree to a right of first refusal by a buyer, consider how long you are willing to tie up your property. 

Be sure to keep the time period  reasonable  to give the buyer a good shot at selling, but not excessive, or you could find yourself missing the market if the buyer can’t sell their own home. 

And whether you are the buyer or seller, be sure to discuss all the implications of this kind of arrangement with your realtor: it’s not a strategy for everyone.