What is a “First Refusal” and why am I being offered one?

What is a “First Refusal” and why am I being offered one?
by Dave Williams

In the real estate business,  we toss around a lot of terms and unless you’ve spent substantial time preparing for your real estate transaction some of them are bound to go over your head.

Fear Not, for our new series of Real Estate Terms will help you sort them out.

Sellers these days are suddenly being introduced to a new concept, the “first refusal” (1st refusal).  It’s sort of like selling your home…but not quite.

First Right of Refusal, is a condition in a sales contract that gives the buyer the first option to purchase your home, in the event you receive another offer.

1280px-HandshakeThis is slightly different than a traditional conditional offer as a contract with a first refusal allows for the seller and their agent to continue actively selling the property and acceptance of offers, but assigned the 1st right to the original buyer in a limited time frame.  the most common use of 1st refusal is when the buyer still has a property to sell and can’t finance two properties at the same time.

A first refusal is the buyer saying (in writing) “I am going to buy your home, I’ve just got to get mine sold first…if you get another offer, let me have the option to say yes I’ll buy your home first.”

As the inventory of homes in Ottawa climbs and homes take a little longer to sell the first refusal is a preferred tactic for buyers to buy time and secure the home they want.

Here’s an example of a first refusal offer and a couple of the possible outcomes.

12 Millers Way has been up for sale for two months, they finally receive an offer from the I…conditional on the sale of the I home at 42 Magrathea Rd.  The I conduct the usual inspections and fulfill their initial conditions on 12 Millers Way, now all that remains is the sale of their home.

Eg.1 The sellers of 12 Millers Way receive and accept another offer, the second set of buyers, the Bronskis, will conduct their inspections and fulfill their conditions and then the sellers will give the Bronskis notice that they have 48h to exercise their first right of refusal.  At the end of the 48h the sellers will have sold 12 Millers Way to either the Bronskis or the Dents and can happily move on.  This strategy is good for the sellers as they know at the end of the notice period someone will have bought their house.

Hands are tiedEg.2 The sellers of 12 Millers Way receive and accept another offer, the second set of buyers, the Dents…however the Dents want the first right waived before they conduct their inspections (and worded their offer as such).  The sellers give notice to the Bronskis who have 48h to exercise their first right of refusal.  At the end of the 48h the Bronskis may say yes and buy 12 Millers Way, or no in which case the Dents will conduct their inspections.  This strategy, while good for the Dents could leave the sellers without an offer or a sale if the Dents decide to walk away after the inspections.

First refusals are one of the emotionally toughest deals on all parties involved frequently coming down to the line, and often holding up numerous properties lined up like dominoes.  In a first refusal situation always take a deep breath and count to ten.

Advertisements

What's your take?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s