Tips for offering pre-emptive rights: essential first steps

Imagine being able to make an offer on a home before any other interested buyers could even take a look at it. If you have a pre-emption right negotiated in your lease or other housing contract, you are the first to buy the property.

But is that really an advantage for the holder of the right of pre-emption? And how does that work? Let's take a closer look at right of first refusal agreements and what they mean for buyers and sellers.

What is the right of first refusal in real estate?

In real estate, the right of first refusal is a provision written into a lease or other agreement. This gives a potentially interested party — say, the right to buy a property before the seller negotiates other offers. It's usually written in your lease. This was long before the owner made the decision to put the property on the market.

This clause allows sellers to market the house at the price they think it is worth. They can actually list the house. But before they even think about accepting an offer that comes their way, they should let you know. The person with the right of first refusal. At this point, the contract holder can decide whether or not you want to buy the property.

If you agree, you make an offer. If you refuse, the owner is free to negotiate with other potential buyers who are interested in the property.

When is the right of first refusal used?

There are a few situations in which a law clause remains relevant.

Between a tenant and a landlord: If a tenant or tenants are interested in buying the rental property in which they live and a right of first refusal clause is written into the lease, the landlord should review their offer before negotiating with other potential tenants, buyers.

Between family members: Usually, this clause is used when a family member wants to buy the house. The family members in question can submit their first offer when the house is put on the market. But if the family is not interested in the real estate at that time, the owner can open it to a third party.

When dealing with a homeowners association or condominium board: sometimes a homeowners association or condominium board inserts a right of first refusal clause in its governing documents. This allows the council to review potential buyers before a homeowner can accept an offer. Many communities use the clause to avoid situations such as discount sales that would reduce their value. In some cases, it even gives the board the option of rejecting an offer entirely.

How does the right of first refusal affect buyers?

A right of first refusal clause in a tenant's contract gives tenants a certain right. They can be the first owners of the house they live in. Of course, if the owner decides to sell it.

The clause is negotiated in the contract from the start of the lease. Tenants potentially have plenty of time to save up for a down payment or to improve their credit score. All before having the opportunity to buy the property.

While the right of ownership and the advantage of time may already be enough to make the right of first refusal a big advantage for renters, there could also be financial incentives to get excited.

Contract holders could end up with the option of buying their rental for a flight.

However, this does not mean that holders of the right of pre-emption always have it easy.

The main disadvantage for a buyer with a right of first refusal is that, since the seller can receive an offer at any time from a third party, the buyer may need to be ready in the short term to make a sale.

If the holders of the right of pre-emption are surprised by the time of registration. If they don't have time to prepare the funds they need, they could miss out.

How does the right of first refusal affect sellers?

In a buyer's market, when homes are plentiful and prices are low, right of first refusal agreements can directly benefit sellers.

Since this agreement is written before the home comes on the market, the homeowner may be able to persuade the original interested party to pay more than the home's current value.

At the end of the day, though, sellers tend to be wary of the right of first refusal. This is hampering their ability to work with other buyers.

They cannot negotiate with a third party until they have received a formal termination of this contingency. A termination by the holder of the right of pre-emption.

In the time it takes to get a response from the contract holder, the safest buyers could lose interest when they visit other properties.

Should you agree to a right of first refusal clause?

No two right of first refusal clauses are the same. Although the buyer gets the first option to buy a property, the terms of each right of first refusal clause may vary.

Some set rules about how long the contingency will last. But also on the proof that the interested party must provide to continue with the purchase of the property or on any exception based on a cash offer.

To determine if a right of first refusal agreement is right for you, make sure all the details are right for you.

Consult a lawyer before entering into a right of first refusal agreement. And as with any contract, read your contingency carefully to get an idea of the deadlines, limitations and/or obligations it implies. You need to do this before signing on the dotted line. Whether you are looking to buy or sell a home, you should always consider all of your options in a real estate transaction before entering into a right of first refusal agreement. This clause is a useful negotiation tactic. But depending on the situation and the current real estate market, it may or may not be worth the risk.