How Does a Right of First Refusal in Real Estate Work?
The right of first refusal is often written into the contract that a lessee has the right to buy a property before the owner lists it with a real estate agent.
In other words, a landlord will give you a chance to buy the property that you are living in. For a young family or person, it could be the perfect way to enter the real estate market. You already know you love the house because you've been living in it for some time.
Selling a home to a tenant can also be very attractive to a landlord because they don't have to go through the aggravation of marketing a home. There will be no showings at inconvenient times, buyers not showing up and a host of other problems sellers have to deal with.
What are the Benefits of First Refusal to a Tenant or Lessee?
There are some real benefits to buying this way when you are young. You will know the property that you are living in, and the buying process will be more comfortable. No need to run around and look at different properties.
Being aware of the good, bad and ugly qualities of a property is a real upside. You may even be able to agree on some repairs and updates before you buy the property. For most young homeowners, that is a huge advantage.
The other advantage is that you don't need to move and deal with all the expenses that come along with it. All you do is to stay in the property and agree to take it over from a specific date. You can still negotiate a price with the owner or real estate agent if there happens to be one. By going this route, you'll probably save on some various fees associated with buying a home.
Is It Easier to Get a Mortgage?
It can be easier to get a mortgage in this situation for a first-time buyer. After all, you have been paying the lease or rent on the property for some time. You can give all of that financial information to the bank, and the owner will be able to back you up.
Providing you have an overall good credit score, it will make it easier for you to get a mortgage with a bank. This isn't to say you won't have to go through the same financial hoops other buyers will. You are still going to need to choose an excellent lender to work with. Picking a superb lender is one of many things a buyer should do before purchasing a home. Having your financial house in order is essential whether you are buying from your landlord or someone else.
The Most Common First Right of Refusal Scenario
In real estate sales, the most common use of a right of first refusal is when a buyer, who already owns a home, would like to buy another. In this situation, the buyer may or may not be in a position financially to acquire the new house.
What the buyer is "saying" to the seller is I really want to own your home, but I am not ready to go through with the purchase yet. So the buyer with a right of first refusal is given an opportunity by a seller to move forward should another buyer come along.
For a right of first refusal to be exercised, the seller must receive a bona fide offer they would be willing to accept. There are usually some time restrictions that a buyer must meet to make a decision. Quite often the period used is twenty-four to forty-eight hours.
It is in a seller's best interest to keep the period short as they don't want to be left empty-handed because the second buyer is pressed for time. Who knows maybe they have two houses in mind or there is a relocation with an immediate decision needed.
A significant consideration for a seller is whether the buyer could move forward or not if they did receive another offer. There is no point in accepting a right of refusal if the buyer is not financially qualified to move forward.
You would be tying your home up with a buyer who might not be able to perform under your required time frame. It should also be noted that a home sale contingency is not the same thing as a right of 1st refusal. In most cases, a home sale contingency is something a seller should be very leery of as outlined in the article at Maximum Real Estate Exposure.
Other Ways Right of First Refusal is Used
There are different ways in which the right of first refusal is used as well. If you are living with a family member, you can have this clause written into the contract. It could be that you have been caring for the homeowner and you have agreed in between that you will be taking over the home after their death.
It could mean "buying out" other family members who have a right to inherit the property but are not interested in owning the home.
If you are renting a condo or dealing with a homeowner association, it is another way to buy a home. In some states, the concept is more popular than others. In fact, some condo associations will have a right of first refusal written into the association documents giving them the right to purchase any home that comes on the market.
What Are the Pitfalls For Tenants?
There are some pitfalls. The personal card often plays a part. You may like the person you are renting the property from and don't want to upset him or her. Try to put personal feelings aside. This is about business, and you need to be prepared to negotiate.
A top tip would be to find out what other similar properties in the area are selling for. Don't be afraid to speak to the seller, more than likely, he or she has an excellent reason for wanting to sell and may be anxious to get rid of the property for one reason or another.
You have been paying the rent or lease, so find out why he wants to sell. Could it be that he or she needs the money?
Talk to your lender and make sure that they are happy, you will still need all of the same paperwork, and you will also need a home inspection.
When you play your cards right, this is actually an excellent way to buy a property. For a young person, it is an excellent way to finally become a homeowner. It cuts down on the hassle factor for the seller. The right of first refusal does not involve endless showings of the home and appointments.
It is possibly one of the easiest and simplest property transactions you will ever make on your life.
Other Helpful Real Estate Articles You May Like
- Avoid dropping your credit score before meeting with a lender - see what not to do when you are going to be buying a home and procuring a mortgage.
- How to Pick a Realtor to Sell Your House - see tips and guidance on how to make the right decision choosing a real estate agent to sell your house.
Use these additional references to make sound decisions when you are buying or selling real estate. An informed buyer or seller will be in a much better position not to make mistakes.