What is a Right of Refusal in the Real Estate World?
What is a right of refusal in real estate?
A right of refusal in the real estate world is a clause included in a contract allowing a specified party the first opportunity to submit an offer on a property before other offers can be considered. In other words, it is a legal form of "first dibs" on a property.
A right of refusal is most often used in a rental situation giving the tenant the first chance to purchase a property when the landlord wishes to sell it. This guarantees that they will be given the option to purchase the home before any other buyer. This means that the owner of the property cannot sell the home out from under the current person residing in the home without giving them the right to refuse purchasing the home.
There is no requirement that the holder of the right of refusal has to purchase the property. They merely get the first chance to purchase it before anyone else.
Most Common Situations for Right of Refusal
The most widely recognized right of refusal is a tenant and landlord situation as described above, but there are some others where right of refusal can come into play, they include:
In some real estate transactions that have these types of governing boards in a community, there can be an attempt to insert a right of refusal clause in the agreement with a homeowner. This means that the co-op, condo board, or HOA holds a right of refusal before listing the home for sale on the market.
Two party arrangements
Right of refusals can sometimes be included in contracts when families of a particular property both own a stake in ownership. For example, siblings inherit a family home. When more than one family member owns the property and one is interested in selling it gives the other member opportunity to purchase the other family member's share first. This can also happen if a property is purchased among friends or if buyers purchase with a parent or other cosigner to help get them into the home. Basically, any property that is owned by more than just one household.
Pros and cons of a right of refusal
If you are a buyer facing a right of refusal situation you have the opportunity to purchase the home before any other competition comes into play. It also gives someone who has been renting at home the opportunity to benefit from gaining equity without having to move.
If you are a seller providing this to another party it means that you run the risk of waiting for the person holding the right of refusal to make their decision. It could also mean selling the property for less than the current market value based on an estimation of what the home could have been worth at the time including the right of refusal clause.
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