What Is the Right of First Refusal (ROFR) and How Does It Work?

Renting or buying a home is a huge milestone, and a certain amount of excitement comes with the purchase. But it can also feel overwhelming when unfamiliar terms start popping up. One term that might raise questions is the Right of First Refusal (ROFR).

This clause, found in some real estate contracts, gives a person “first dibs” on a property once the owner decides to sell. While this clause can benefit both parties, understanding how it works is essential before moving forward.

In this article (Skip to...)

• What is the Right of First Refusal (ROFR)?
• How does the Right of First Refusal work?
• Right of First Refusal vs. Right of First Offer
• What are the pros and cons of an ROFR for the buyer?

What is the Right of First Refusal (ROFR) in real estate?

The Right of First Refusal (ROFR) might not be something you hear often, but it’s an important concept to understand—especially if you’re renting a home.

In the event that your landlord decides to sell, the ROFR gives you the first opportunity to purchase the property before it’s offered to other buyers.

Likewise, if your landlord receives an unsolicited offer from a third party (while the property isn’t listed for sale), they’re required to notify you and give you the opportunity to match the offer and purchase the property yourself.

When renting, there’s always the risk of a landlord selling the home, leaving you to find a new place to live. However, if your lease agreement includes a ROFR clause, you can buy the home without competing with other buyers on the open market.

Since not all lease agreements include this clause, you can ask your landlord to include one if you plan to live in the rental long-term.

Similarly, if there’s an inherited property in the family, a ROFR gives an owner’s relatives a chance to buy the home and keep it in the family.

This type of agreement is also common with joint property ownerships, like in a business partnership. If one person wants to sell their share of a property, the other person is given the first opportunity to buy it.

How does the Right of First Refusal work?

The Right of First Refusal process is fairly straightforward. With a home sale, it begins when a property owner makes the decision to sell. They’ll determine the terms of the sale (such as the sale price), and then notify the ROFR holder before listing the property on the open market.

The holder is given a specific timeframe to either accept or decline their offer. If they don’t buy the home, the seller can then list the house and sell it to another buyer.

It’s a similar process in cases of joint ownership. If Owner A decides to sell their share of a property, they must give Owner B the first opportunity to buy it. If they refuse, Owner A can then sell their share to someone else.

And if a home or land has been in a family for generations, the primary owner must give their relatives the first opportunity—before it’s sold to a non-family member.

Right of First Refusal vs. Right of First Offer

The terms Right of First Refusal and Right of First Offer (ROFO) are sometimes used interchangeably. But while both give a specific party the first opportunity to buy a property, the process is slightly different.

The main difference with a ROFO is that while the holder still gets the first opportunity to make an offer, the seller can list the property and receive offers from other buyers at the same time. In other words, the seller isn’t required to wait for the holder to decline before putting the home on the market.

And once the ROFO holder makes an offer (if they choose to), the seller can accept or reject it. If rejected, the seller considers offers from other buyers.

What are the pros and cons of an ROFR for the buyer?

The ROFR has both advantages and disadvantages, depending on how the parties set up the agreement.

Pros of Right of First Refusal

1. First dibs on the property: You get the first chance to buy a property before it’s listed and sold to someone else. This is a plus if it’s a property you’re currently renting or a family property.

2. No bidding wars: You avoid the stress of competing with other buyers or getting caught in a bidding war.

3. Time to prepare: Knowing you have an ROFR can give you time to plan. You can start saving, improving your credit score, and researching finance options.

Cons of Right of First Refusal

1. You don’t set the terms: The downside of an ROFR is that you can either match the seller’s or third-party’s offer as is, or let it go—so there’s little room for negotiation.

2. Short decision window: Many ROFR agreements often include a tight deadline for you to decide, sometimes just a few days.

3. You need to be financially ready: You must be able to match an offer or accept the purchase terms, as well as qualify for financing.

4. No guarantees: The ROFR only happens when an owner decides to sell. If they hold onto their property for years, there’s no guarantee you’ll get the chance to buy the home.

5. Unfavorable terms: The deal might include terms you don’t like such as a higher price. You’ll have to accept those terms or walk away.

The bottom line

Understanding the Right of First Refusal is important because it can affect the buying and selling process. As a buyer, it gives you the chance to purchase a property before others, but it also comes with specific terms.

Knowing the pros and cons helps you determine whether to include this clause in your rental agreement. If you have questions, speak with a real estate professional or attorney to understand your rights.