SHOULD I SELL MY HOME USING A “RIGHT OF FIRST REFUSAL”
REAL ESTATE PRACTICE, TIPS FOR BUYERS, TIPS FOR SELLERS
September 22nd, 2008
Real estate agents routinely counsel their clients on the pros and cons of an offer that contains a sale contingency. This is when a buyer, that wants to buy your property, conditions the purchase on finding a buyer to buy their property. If the buyer can’t sell their property, they don’t have to buy your property. This can tie up the seller indefinitely, unless the seller has an escape clause.
This release clause, referred to as a right of first refusal, allows the seller to review and accept a back-up offer from a second buyer, as long as the first buyer has an opportunity to perform on their offer, within a specified period of time, or withdraw from the sale and receive a refund of their deposit. Sounds easy enough, but in the real world, it can get somewhat complicated.
Once a seller accepts an offer with a right of first refusal, MLS rules require the listing agent to change the listing status to pending, with a designation that the property has a release clause. The listing will be included when any agent searches the available listings, but the designation discourages some agents from showing the property. The agent knows that by showing the home, their client could end up making an acceptable purchase offer, only to have the first buyer exercise their right of first refusal, dashing the second buyer’s right to buy the property. This can cause some bad feelings between the agent and their buyer because the buyer is under the impression the first buyer must sell a home to complete the purchase when that is not always the case.
The first buyer might be lucky enough to sell their property in the nick of time, but in practice, the first buyer doesn’t really need to sell another property. The buyer merely preferred to sell their property but could have made the purchase outright, using one of many bridge loans, or a rich uncle that will give them the cash to tide them over until they can liquidate their real estate holding and pay him back. Once a buyer that has a right of first refusal in place on a property they really want to buy, they will stretch to make it work when given an ultimatum. This fact, regarding the buyer’s true capability, does not come to light until their hand is forced by the offer from the second buyer. In effect, the second buyer is used as a hammer to make the first buyer complete the sale.
A smarter approach is not to use a right of first refusal at all. Instead consider one of the following options:
- A fixed window of time for the buyer to sell their property. If the buyer fails to procure a purchaser,
the seller can cancel the deal and be released from any and all obligations to sell to the buyer, and the buyer’s deposit is refunded. This time frame is typically a week or two to a month or two at most. - Option money consideration. The buyer tenders a significant sum of cash, that is released to the seller as consideration for the seller removing the property from the market for a specified period of time. The option money is not refundable, but is typically applied to the purchase price if the buyer ultimately completes the purchase. The term can be for any amount of time, but normally is for a month or longer. The higher the option money consideration, the longer the period of time the seller allows their property to be tied to the contract.
- Tell the buyer to sell their property first, then come back with a purchase offer. Most sellers will consider accepting a contingency on the closing of an escrow on the buyer’s property.
Depending on whether it is a buyer’s or seller’s market, these terms may or may not be incorporated in the purchase contract. With the slow pace of sales today, sellers are unlikely to accept a sale contingency. Three years ago, when everything was selling at a hectic pace, sale contingencies were common. It is important that buyers and sellers understand the implications and legal obligations that surround usage of these terms. It is even more important to have an experienced and trusted adviser on your side of the table explaining the ins and outs of any such agreements.
Contact me, if I can be of assistance:
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL ESTATE PROFESSIONALS GMAC
QUARTER CENTURY LOCAL REAL ESTATE EXPERIENCE
free to sell…
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