What is right of first refusal in condo?

August 15, 2021 by Augustine Reyes Chan

What is a right of first refusal (ROFR) for condo boards in New York City? Read on, and we’ll let you know all about it. And how it can affect you if you buy a home in the city. In New York City, co-op boards are notorious for scrutinizing potential shareholders. Condo boards operate differently. They have limited power to review a potential homebuyer’s finances thoroughly. Also, they typically don’t conduct onerous board approval interviews. This works in favor of the potential buyer. The condo board leaves them with little say in who is purchasing an apartment in their building. But that’s a myth. Why? Because a condo board in New York is not as lenient as many homebuyers think. Real estate agents and insiders know this. But you don’t often hear of it.

Nearly every condo in New York City has the right of first refusal (ROFR) written into its bylaws. This allows it to preempt your condo unit’s sale and purchase it for the same price you and the buyer agreed upon. So what is a right of first refusal in real estate, and how does it work in New York City?

What does the first right of refusal mean? A right of first refusal allows a condo board to have some controlling power over selling a unit in the building. This means the condo board can deny your pending sales agreement with a buyer. The board can purchase your unit at the same price the home buyer, and you have settled on.

The board has a limited amount of time—30 days—from when the sales agreement is signed to match the sale price of the condo unit between the seller and the buyer and use their funds to purchase it. Furthermore, the right of first refusal can effectively discourage a potential buyer from purchasing a unit in the building.

Condo boards rarely turn to the right of first refusal. It is challenging to raise money or get a loan to purchase a unit in their building. It can also engender risk for the condo if it can’t close on the purchase itself.

Furthermore, a board rarely exercised ROFR because owners in the building would oppose what the board is doing more often than not. And besides, the condo’s bylaws are designed to discourage a ROFR. Finally, the ROFR can cause a divide between the condo board and the seller and even result in a legal dispute.

In general, the condo only exerts its right in intolerable cases.

Yes, a board sometimes uses its  ROFR to protect owners by intervening in low-comp sales. The ROFR can help the condo board step in and make money on a resale. This is when they see a unit sold below market value in their building. The ROFR can prevent the completion of the sale from going through to preserve the pricing of their other units.

For example, condo owners wouldn’t be delighted if a neighbor decides to sell the property at half its market price to his family member. That’s because a low purchase price can affect the financial integrity of the entire building. Indeed, the sale goes through and becomes a sale of record.

This can significantly affect comps and lead banks to assume that the low purchase price of a unit represents the costs of the other units.

A low sale means low appraisals throughout the affected building. And this leads to low comps, which in turn can tarnish current unit owners’ resale values. The board can prevent a low sale if it buys the property, as it has the right to pay the seller the same amount.

It invokes the right of first refusal and then sells the unit at a higher price. The board keeps profits in the condo board’s reserve funds.

If a stringent real estate agent can negotiate a sale of a unit at a very affordable price, this doesn’t mean the condo can reject the prospective homebuyer. The condo board can only deny you if they invoke the ROFR and purchase the property themselves.

The homeowner association can exercise its ROFR by purchasing units because they need them for specific reasons.

The board may need space to give the superintendent a place to live. Another example, the board can use it to benefit the building’s owners. As an illustration, a board can turn the apartment into a common area. The board can also use it to generate income if it rents out.

Furthermore, the building can reserve the unit for event space.

The ROFR clause or ROFR agreement can be invoked if the board feels that a homebuyer is undesirable. Also, the ROFR can protect the condo if the prospective homebuyer’s financials are sub-par or lacking.

In this way, the condo board is similar to a co-op board. The board will likely do a full background check on the buyer to see any skeletons in the closet. If it turns out that the homebuyer has a violent criminal record, then the condo would most likely exercise its right of first refusal.

But a condo can’t invoke the ROFR to discriminate against people of color,  mental or physical disability, or age. A condo also can’t invoke the ROFR if an interested buyer purchases a unit in the apartment without the board even knowing it. In this case, the condo may have to resort to litigation to prevent the sale.

The buyer can also take the condo to court. Let’s say the buyer has a violent criminal record, and the board blocked the buyer from purchasing a unit.

In essence, if you find a piece of property that you’d like to buy that may not be on the market yet, or that you’re uncertain about purchasing, it can serve as a form of insurance of sorts.

As a rights holder under an ROFR clause (and this right can only be held by someone other than the property owner or their lender), you gain the option to decide whether or not to make a real estate purchase before others can, and at a predetermined price, as most ROFR contracts set the purchase price before the property comes on the market. However, if you do not wish to proceed, you can simply waive your rights and move on.

A right of first refusal is generally negotiated before a homeowner decides to sell their property. Under its terms and conditions, prior to members of the general public being allowed to put in an accepted offer on a residence, the home seller must first make a purchase opportunity available to the person who holds the right of first refusal.

Of course, for these reasons, an ROFR generally comes with a time limit on it that states how long a buyer has to negotiate with a seller before their window of opportunity and right of first refusal expires. Upon expiration, the home seller is free to engage with other potential buyers.

Another real estate term you may hear besides ROFR is ROFO, or right of first offer. While both of these clauses allow a buyer to make the first move, ROFO doesn’t require the seller to negotiate with the rights holder.

The right of first refusal allows tenants and prospective buyers who may already be invested in a property the ability to make the first offer on a property and potentially purchase it.

In New York City, it’s a well-known fact that co-ops boards can be incredibly thorough and invasive when scrutinizing a potential buyer. If the board doesn’t feel like a buyer is up to snuff financially or personally, they can reject a buyer without providing a reason.

By contrast, condo boards have a lot less power to forestall a buyer. They usually don’t require buyers to submit intricate board applications, nor do they subject them to awkward board interviews. Typically, any presale meeting between a buyer and a condo board will be little more than an informal meet-and-greet, with the sale itself being a done deal. Well, most of the time, anyway.

The truth is that condo boards do have one card up their sleeves that can block a purchase from going through. It’s known as the Right of First refusal (ROFR), allowing a condo board to muscle out a buyer and purchase the condo unit for themselves. How does ROFR work, and what does it mean for the buyer and seller?

ROFR is a privilege held by condo boards that allows them to step in and purchase a condo unit on the same terms as the prospective buyer who has already signed the purchasing contract. This privilege doesn’t extend in perpetuity. A board typically has only 30 days after a purchasing application has been submitted to raise the money for the purchase. They can request more information to delay the closing day and frustrate the buyer in the hope that the deal will fall through, but they cannot extend the 30-day timeframe.

Almost every condo building in NYC has ROFR written into its bylaws. It primarily exists to protect the interests of condo owners against a below-market value sale. This typically happens in resales when the owner wishes to give a family member or friend a good deal by selling for less than the unit is actually worth.

This matters because a unit sold for below market value can spell bad news for the financial integrity of the entire building. Sales comps will be affected, and banks may be led to assume the low sales price reflects the value of other units in the building, resulting in lower appraisals and declining market values for every unit in the building. By invoking ROFR, the board can protect the resale values of other condo unit owners.

In addition, a condo board may also use ROFR to block a buyer whose finances don’t quite add up. Buyers may be asked to provide more information but rarely to the extent that a co-op board might ask. Also, some condo boards may invoke ROFR because they need the unit for other purposes. For instance, to provide a place for a superintendent to live or as a common area. Whatever the reason is, though, the bottom line is that ROFR can only be exercised when the board can pony up the cash for the purchase.

Condo boards in NYC rarely exercise ROFR. The main reason is that it can be very difficult to raise the necessary funds for the purchase through either a special assessment or a loan. Even if the funds can be raised, the board may come under heavy opposition from the buyer and seller, especially if the sales price is reasonably priced at market value. There may be litigation if the board persists in exercising ROFR on a fair deal, which will frustrate every condo owner in the building as a lawsuit will eat up the building’s cash reserves and damage its marketability.

Another stopgap to a board exercising ROFR is that most condo bylaws require a supermajority of condo unit owners to agree, usually at least a two-thirds majority. As such, you will likely only see a condo board invoke ROFR when they find themselves in an intolerable position, such as a shady under-the-table deal for well below market value.

That said, it’s not completely unheard of for some condo boards to abuse their ROFR to discourage a buyer from completing their purchase. As per most condo bylaws, the board has only 30 days to invoke ROFR after submitting the purchasing application. However, an unethical board could try to delay the process by asking for something trivial that wasn’t included in the purchasing application.

The hope is that by entangling the buyer in bureaucracy, they will become frustrated enough to abandon the deal. It’s a lowball tactic that won’t work if the managing agent has already signed off on the purchasing application as being complete and ready for review.

A condo board’s ROFR is one of the few tools they have to prevent a buyer from closing on a deal. As such, buyers should know how ROFR works in case they ever find themselves in the crosshairs. That said, it’s not too difficult for buyers to protect themselves against an ROFR situation. Just make sure your transaction is an honest by-the-books deal while also presenting yourself as someone who is likely to be a good neighbor.

A right of first refusal, also called a ROFR, the first right of refusal, or a last look provision, gives a person or company the opportunity to start a business transaction before anyone else can. It could provide the first chance to buy stocks or real estate at the same price and terms as another offer. If the holder of the right of first refusal declines, the owner of the asset can sell it to whomever they want.

There's even a ROFR in many child custody agreements. It requires that one parent offer the other parent the chance to watch the kids before using a family member or outside child care.

A right of first offer or ROFO requires owners to tell the holder first when they plan to sell an asset. Then the holder of the ROFO has the right to make the first offer on the business, stocks, or property. The seller can accept or reject the offer, speak to other buyers, and negotiate with the holder. A ROFO can reduce transaction costs and save time. Selling a business often takes lawyers, investment advisors, and accountants. Buyers and sellers are motivated to negotiate quickly to cut costs, so buyers usually give fair offers. Sellers can wait for better offers, but buyers could reduce their bids.

Many commercial leases have these provisions. They give businesses more security if a landlord goes bankrupt or decides to sell the property they rent. Venture capital investors and other companies often use the right of first refusal to get the best price on stocks or entire companies. Holding a ROFR and waiting is usually more profitable than buying an asset right away. Also, business partners in joint ventures usually grant each other this right so they can keep a newcomer from buying a stake in their firm if one of them wants to sell their shares. Shareholder agreements in private companies often have similar terms. A publisher could even ask for the right of first refusal on future books from a new author. If no one is already holding a right of first refusal for a property or company, the first bidder can ask for it or the seller can offer it to attract buyers.

A real estate owner wants to sell to a purchaser for $1,000,000 with certain terms and conditions. Since a third party has a right of first refusal to buy the real estate, the owner must offer it to the holder of the ROFR with the same terms as the buyer's offer. The buyer can only get real estate if the holder refuses. A ROFR is essentially an option to buy a property before it's sold to another buyer. The seller and the holder can choose to agree on a price and other terms in the ROFR or negotiate later. The option could end at a specific date in the future, and the owner doesn't have to sell if the terms aren't already established.

A right of first refusal can also be on each stock purchase or grant agreement or it can be in a startup's bylaws. Some startups use both methods, which is called the belt and suspenders approach.

A right of first refusal keeps the person holding it from losing an essential asset. Many commercial tenants prefer to lease premises, but they would buy to prevent eviction by a new owner. A right of first refusal gives tenants a chance to buy and stay at their location.

A holder and a buyer negotiate sale terms for a certain period. Then, the buyer must sell if the holder wants to buy it within that time. For example, two parties could agree that 100 acres worth $100,000 now will rise 3 percent per year in value, with or without compounding. A ROFR can also give holders the right to match any offers from potential buyers. Holders pay for the right of first refusal in many agreements or contracts. If the holder can't meet future terms, the seller can sell to anyone. Some agreements only let the holder make an offer at the end of the term, while people can use others anytime. ROFRs usually last one or two years since longer terms are riskier.

How would you like to be first in line to purchase a property that someone else has negotiated to buy? What if you could review any offers on the property and decide if you want to buy it at the same price?

If you’re a Homeowners Association with a Right of First Refusal, you can do just that.

The Right of First Refusal (ROFR) is a clause that gives the HOA the right to purchase a property before the seller accepts another offer. The seller can market the home but before they can actually sell to a potential buyer, the HOA must be given notice and an opportunity to buy the property.

Not all HOAs have a right of first refusal clause written into their governing documents. However, many do and this phrase allows the HOA to take priority over other offers.

“I typically see the First Right of Refusal clause in high rises or condominium complexes,” says Michelle Unwin of Ebby Halliday Realtors. “Even when an HOA retains a right of first refusal, they rarely exercise it. In fact, there is usually a mechanism in place for releasing the clause.”

While the governing documents for HOAs differ, the ROFR clause typically sets out specific conditions. Generally, when the owner receives a written offer, they must contact the HOA and offer them the right to purchase the unit for the same price and with the same terms offered by a buyer.

Then the HOA can decide if they want to match both the price and the terms of the offer. If the HOA declines the opportunity or does not employ their right within a specific time, the seller may sell to their buyer.

Most HOAs are not interested in getting involved with buying and selling units and therefore waive their ROFR.  They are more interested in collecting dues, maintenance, and operations of the property. However, there may be a few reasons why the HOA could opt to carry out their right.

“The benefit to a right of first refusal is that it allows an HOA some degree of control over the transfer of units,” says Unwin. “Most communities use the Right of First Refusal to prevent a below-market, discounted sale that would lower the value of the other units. For example, an HOA board might exercise its ROFR to prevent a below-market sale that would affect the appraisal value of comparable units.”

The HOA could have other reasons to invoke a ROFR.

“It offers an HOA the chance to purchase a unit to make a community room or a guest apartment or the property manager’s apartment,” Unwin adds. “This provides the HOA opportunities to enhance the community’s functionality in an ever-evolving marketplace.”

A few Dallas area HOAs have clauses in their documents that require the potential buyer to complete a disclosure, an application or even submit to an interview when considering its right of first refusal. While more unusual, it allows the HOA to exclude undesirable buyers from their community. Although the HOA governing documents may allow a broad right of first refusal, it cannot be used for illegal or discriminatory reasons.

Each association is unique in its rules, requirements and goals for the property and its residents. Check with yours before you agree to sell your property.