Question of the week:

How do first refusal clauses work?

Hello all,

I am just looking for some advice. I am looking to purchase a house and sell my current house. My real estate agent is strongly suggesting that I don’t make an offer on the new house conditional on the sale of my current house. He believes there is little to no chance they would accept an offer with that condition. My house is being listed next week and the potential closing of the new house is over 90 days away.

I was under the impression that most residential real estate deals occur with the condition of selling the buyers house to avoid the risk of the buyers home not selling in time and being unable to close.

Does anyone have any advice regarding applying / not applying this condition?

The area is Barrie, Ontario

Thank you!

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Nick's Response

I’m not sure of the state of the Barrie market, but it sounds like your Realtor is doing the right thing by advising you on what he thinks will work based upon the current market while still leaving the door open for you to choose to include the clause if you can’t be comfortable without it.

 

What you’re describing is called a “First Refusal Clause,” a condition of the sale of your current home as a condition of purchase on your next home. This generally comes with a correlating “escape clause” for the Seller that says that if they receive an acceptable offer on their home before you’ve removed all conditions, then you’ll have X number of hours (usually 24 or 48) to decide to remove your conditions and deny the new buyers.

 

On their face it seems like a really attractive clause for a homebuyer; it provides a safety net for you so that you avoid the possibility of carrying two properties. In practice, however, it can be a real pitfall for homebuyers in which they get mired down making offers with this clause that no sellers accept.

 

From a Sellers’ point of view, a Buyer’s offer with this clause creates uncertainty. Accepting it means that even if another, more attractive offer comes along, the first Buyer could still deny it by removing their conditions. Worse, the first refusal needs to be disclosed on the MLS and a significant number of Buyers will avoid putting in an offer on a property that has a first refusal in place on it. It’s also been my experience that many Buyers (and their Realtors) who use this type of clause are inexperienced and then go ahead and mis-price the home that needs to be sold as part of the conditions, making the whole process frustrating from the Seller’s point of view. When I am working with Sellers, I will counsel my clients to reject any first refusal clauses unless a) the market is balanced or a Buyer’s market AND b) the Buyer has a highly sell-able property that they will list at an appropriate price for a quick sale. We’ll even make the list price of the Buyer’s property part of the Agreement of Purchase and Sale.

 

For a Buyer, because this clause introduces additional uncertainty into the purchase, the Seller expects to be paid a premium for accepting a first refusal. In my experience the amount seems to be anywhere from 1-5% of the purchase price, which is significant.

 

Because you’ll be paying more and potentially missing out on homes to get a first refusal clause accepted, here are some other ways that you might consider proceeding:

 

  • Listing and getting a conditional sale on your home before buying. You can even make accepting an offer conditional upon your target property being available.

  • Purchasing with a long (90+ days) closing date. By having a long closing date, you’ll give yourself time to list and sell your home. Just make sure that you’re realistic about the listing price.

Good luck on the move and let us know how you decide to proceed!

Source: I’m a Realtor in Ottawa, Ontario.

3 Places where you can save money on your offer as a Buyer

1

Know the Market – Your best weapon is knowing where the market is, where it’s going and to have a strong grasp on relevant comparable homes to your target property. If you’re in Ottawa, ask to be put on our weekly e-newsletter to keep the pulse of the city.

2

Unconditional Offers – Don’t do this recklessly, but Sellers will pay for the certainty of an unconditional offer. I’ve found in Ottawa that usually translates to 1-2% of the asking price of the home. Protect yourself by doing your due diligence before you place the offer instead of including it as a condition.

3

Don’t Get Emotionally Attached – Never fall in love with a home until you’ve got the keys in hand. If you can negotiate unemotionally (your Realtor can help with this) you’ll be much more effective.

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