What is Right of First Refusal?
Right of first refusal (ROFR) is a contractual right that gives an existing party the opportunity to match the terms of any offer the property owner receives from a third party before the owner can accept that outside offer. If the ROFR holder matches the terms, they get the property. If they decline or don't respond within the specified time period, the owner is free to sell to the third party on those same terms.
ROFR is a restrictive covenant that can complicate property sales. For investors looking to buy properties subject to ROFR, the right creates uncertainty — you can negotiate and agree on terms with the seller, only to have the ROFR holder step in and take the deal on the same terms. Understanding where ROFR exists and how it works helps you avoid wasting time on deals that may be snatched away.
Where investors encounter ROFR
HOA and condo associations: Some condo associations and HOAs have ROFR provisions in their governing documents that give the association the right to match any outside purchase offer. This is common in co-ops and some planned communities. The association uses ROFR to control who moves in and to prevent sales below a certain price that might depress comparable values.
Tenant rights: Some jurisdictions (particularly in the Northeast) give tenants ROFR when the landlord decides to sell the property or convert it to condos. The tenant has the right to purchase the property at the same price and terms offered to an outside buyer. This is especially common in rent-controlled or rent-stabilized housing.
Partnership and LLC agreements: Many operating agreements for real estate LLCs include ROFR provisions requiring that members offer their ownership interest to existing members before selling to outsiders. This prevents unwanted partners from being introduced into the entity.
Ground leases: Properties built on leased land often include ROFR provisions giving the ground lease holder the right to purchase the improvements, or giving the improvement owner the right to purchase the land.
How the ROFR process works
Step 1: Owner receives offer from outside buyer for $300,000.
Step 2: Owner notifies ROFR holder of the offer terms.
Step 3: ROFR holder has a specified period (typically 30-90 days) to match the terms.
Step 4a: ROFR holder matches — they purchase on those exact terms. Outside buyer loses the deal.
Step 4b: ROFR holder declines or doesn't respond — owner proceeds with outside buyer on the same terms.
Impact on investors
ROFR creates a delay in the transaction (the matching period) and uncertainty about whether the deal will close. As a buyer, you invest time in due diligence, inspections, and financing only to potentially lose the deal to the ROFR holder. As a wholesaler, your end buyer faces the same risk, which may make the deal less attractive or require you to disclose the ROFR upfront.
Before investing significant time and money in a property subject to ROFR, assess the likelihood that the ROFR holder will exercise their right. An HOA that has never exercised ROFR in 20 years is unlikely to start now. A tenant in a rent-controlled apartment who is paying below-market rent has a strong incentive to exercise ROFR to preserve their housing situation.