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The pitfalls of Right of First Refusal


In a volatile market, determining the value of the property can be a challenge.

In a volatile market, determining the value of the property can be a challenge.
When appraisals are inconsistent and the parties cannot agree on a value for
the purposes of dividing the real property, a suggestion may be made to list
the property for sale to see what a ready, willing, and able buyer may pay for it
— and that’s how value would be determined.

Depending on the offers that result from the listing, one of the parties may
exercise a right of first refusal and buy out the other party’s share based on
the highest offer. After all, if fair market value is determined by what a ready,
willing, and able buyer may pay, then this seems like the most equitable
solution to the fair market value dilemma.

In theory, this strategy sounds easy enough. However, when played out in the
real world, it is riddled with problems, such as the following:

  • MLS Disclosure: Rules and regulations for the Multiple Listing Service
    dictate what must be disclosed and what the actual status of a listing is.
    If there is a “buyer in waiting,” who will be privy to all other offers and is
    in a position to trump them, that must be disclosed in the listing.
    However, by disclosing this fact, buyers may be deterred from placing
    an offer to begin with, thereby reducing demand and value.
  • Listing Agreement: Executing a listing agreement means the seller is
    entering an employment contract to pay a broker should the property
    be sold, and in most cases, “or otherwise transferred.” This means that
    the parties can be on the hook for commissions should a buyout occur
    after it’s been listed, resulting in the costliest of “appraisals.” 
  • Counteroffers: Obtaining an offer is one thing, but settling on a final
    sales price is another, and it involves negotiation. So the question
    remains: Is the right of first refusal based simply on initial offer amounts,
    or is it based on the agreed-upon sales price after rounds of zealous
    negotiations? The difference can run into tens, sometimes hundreds of
    thousands of dollars, depending on demand.
  • In-spouse Sabotage: If the party living in the home is the same party interested in keeping it through a buyout (after value has been determined based on an offer price), there is an inherent conflict of interest. Showings can be declined. The condition of the property can be disastrous (clutter, pet odor / feces, locked rooms, green or empty

swimming pools, overgrown yards, and the list goes on...). The in-spouse
may shadow the buyers throughout their showing and describe all the
harrowing things wrong with the house, the terrible things that have
happened in the house, and paint a nightmare picture of the conflict in
the divorce itself that leaves qualified buyers running for the hills.
Parties in this situation are also known to inform buyers, “I’m not selling
the house, so if you put in an offer, you’re just setting the bar for what
I’ll pay.” Any one of these things will diminish the value, because it
amounts to market manipulation by suppressing demand.

  • Net Proceeds: As discussed regarding counteroffers, the net amount
    due to the parties is a result of negotiations that last throughout the
    duration of the listing and closing. Once inspections are performed,
    repairs or credits are then negotiated. Once a buyer obtains an
    appraisal, both repairs and final sales price are negotiated. If a right of
    first refusal is based on “offers,” then a true representation of value isn’t
    really established until all this is hashed out, deep into the closing
  • Purchase Contract: Once a seller enters into a purchase contract, it can
    be very difficult to cancel. Any right of first refusal should not further
    exacerbate the liability of the parties when they execute an offer.

  • Ethical Consideration: Buyers and their agents spend countless hours
    shopping for houses, coordinating schedules, arranging childcare,
    meticulously pouring over data to determine what they should offer,
    coordinating with their lender on loan approvals, involving friends and
    family in their house-hunting journey, etc. Consider that utilizing a right
    of first refusal to settle the parties’ disagreement over property value
    involves many innocent people. Their time, hopes, and stress are all
    intentionally wasted since they are nothing more than a “pace vehicle”
    to settle an appraisal dilemma for conflicted parties.
    While determining value in a changing market can be difficult, the use of
    experts can be a much better — and cheaper — solution. Involving an
    appraiser, a CDRE®, a home inspector, and a contractor if necessary, to establish a value based on educated and reliable evidence is a far better solution.

Should you need a neutral, expert mediator to facilitate these negotiations,
give me a call and I’m happy to evaluate your needs to determine if I can help.

Work With Andrea

I take a holistic approach…it's not about the "bricks and the sticks" for me. It’s about how I can help each family or individual fulfill their long-term goals.

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