It is funny what kinds of deals or ideas come across my desk each and every day. Just this week alone the concept of a Right of First Refusal (RoFR) has arisen at least two times. These types of deals don’t usually show up but they can become quite powerful when needed. They are not just part of real estate they can be seen anywhere when a seller wants to sell something and another party may want to buy that item.
If you are unfamiliar what a Right of First Refusal is as it pertains to real estate it is basically what the name states. It means that the person who may be doing the buying (in this case a piece of real estate) the first right to buy when the seller is deciding to sell the property. Thus, before another party (i.e., a third party) can actually purchase the property the person who has the right is given the right to buy it first.
Now as many of you know I have done a lot of lease option properties over the years. And this may sound similar to the lease option. However, there is some truth to that and there are some very strong oppositions to that as well.
It breaks down to a matter of control and who has the rights. Let me explain the difference and then we will see when one of these may be the best choice for you when something comes up.
In a Lease Option the buyer is buying the right to buy a property at a price within a certain time frame. They are usually paying a payment called an option payment in order to have that right to buy. The tenant which is also now the buyer (often called a “tenant/buyer” or “buyer/tenant”) has the control in this contract. Unless otherwise specified the tenant can “exercise their option” and convert the rental into a ownership at any time he or she wants. They say I am now ready to buy and then they open escrow and the buying process begins while they are still living in the home.
A Right of First Refusal will have a similar possible result yet control has flipped. The tenant has expressed interest in buying the home they are renting and that is pretty much all there is to it. However, the seller or owner of the home decides went the home is ready to go to market. The tenant is given the first right to buy the home prior to it being listed or sold to a third party. In the ideal scenario the tenant will exercise their right and begin the buying or escrow process. But, if the tenant is not ready to buy then they give up this right and now the seller can move on to another party to purchase.
Here is the possible benefits to the would-be buyer even if they are not ready to buy yet the seller wants to sell. I am not an attorney and I have only once played one on TV. This is not me giving legal advice in any case and you should consult a local attorney to verify my words here. If this seller wants to sell the home to another person and he has a signed rental agreement in place then that new third party buyer must honor the that rental agreement. Thus, if they are still under contract the new buyer must be an investor. A normal owner occupant buyer won’t be buying a home that they cannot occupy when they close especially if there is significant amount of time left on the rental contract.
This can be the main backup strategy for the tenant living in the home. They cannot buy at one point in time yet now they can act fast to do whatever they need to do so that they can qualify to buy.
Here is another benefit of a RoFR versus the Lease Option. In a lease option the tenant/buyer is usually putting down a significant non-refundable option payment (usually between 2 – 10% of value of home) to buy that right to buy. That is great because it is giving the upper hand in the transaction. However, if you don’t have that money to put down then a Right of First Refusal can be the next best thing. In a RoFR you are doing a regular rental with the regular refundable deposits. So, no extra money out of your pocket.
When I was with my clients earlier this week they were on the fence of renting versus doing a lease option on the same home. I mentioned this strategy to them. This could be a way to see if they like the area without putting down that much money. Yes, if they don’t buy they will eventually have to move. But, they didn’t risk the big money. Yes, they give up control so that could be a downfall.
I hope this helps you in your future.
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