First Right of Refusal or Contingency Contract
What is a first right of refusal contract, also known as a contingency contract? Whether you’re a Buyer or Seller, there are serious implications to consider to make sure all the puzzle pieces fit if you’re thinking about making or accepting a contingency offer.
What exactly is a first right of refusal? In a nutshell, it is an offer that is dependent on a Buyer (let’s call her Mary) being able to sell a property she currently owns before she can move forward with the purchase of a new home.
Mary has a house to sell. No one has made an offer. But she goes house hunting to see where she might like to live when she does sell her house. Mary finds the home of her dreams and doesn’t want anyone else to buy it. Unfortunately she can’t purchase a new house until she sells the old one. So she makes an offer contingent on the sale of her current home. There is usually a time period in the offer when she will have to perform on the contingent contract, usually one to two months.
If her house hasn’t sold in the specified time period, her offer falls through. The Seller (let’s call him Bob) can then put his house back on the market. Depending on how the contingency was written, Mary may or may not get her earnest money back.
Should Buyer Make a Contingency Offer?
In this scenario, it is not wise for Mary for several reasons.
- Mary offers more than she might have otherwise paid to make it more appealing to the Seller to take his house off the market
- Because she wants this house so much, she lowers the price of her current home so it will sell quickly
- She then makes concessions when her Buyer comes along that she would not normally have made if she wasn’t anxious to sell
Mary could potentially lose tens of thousands of dollars by not waiting.
There is usually a First Right of Refusal Clause (in some states it’s called a Kick-Out Clause*) that puts a time limit on Mary’s contingent contract. That means if Buyer #2 (let’s call him Sam) comes along, Mary has the first right of refusal, usually only a day or two, to remove her contingency. If she could have purchased without the contingency, she would have done that at the beginning. Now she’ll likely lose the house she loves to Sam, and Mary has gained nothing but frustration.
*A Kick-Out Clause allows the Seller to “kick out” the Buyer if another offer comes in without a contingency.
If Mary had waited until she had a solid contract on her current home, she would have saved thousands of dollars. Not only that, if the house she wanted is still on the market when her house is Under Contract, she might get it at a lower purchase price. That’s how a contingency contract works on the Buyer side. But what about the Seller?
Should a Seller Accept a Contingency on His House?
Bob is getting showings on his listing when Mary comes along and falls in love with his house. Unfortunately she has a house to sell first. So she makes a first right of refusal offer. In reality what that means is she can’t buy until she sells her house – which isn’t even Under Contract yet.
In Colorado, as soon as a Seller accepts any kind of offer, we are required to change the MLS to reflect that there’s a contract on the house, even if there’s a kick out clause. Showings almost always stop because potential Buyers don’t want to compete because it’s Under Contract. Essentially, Bob’s house is off the market until Mary sells her home or the contingency runs out.
If Bob is lucky enough to get another offer from Sam while his house shows Under Contract on the MLS, they all have to wait the specified number of days in the contingency to see if Mary can perform on her first right of refusal. That would include Mary providing evidence of funds to be able to close. PLUS, Sam might find another house in the next few days and withdraw his offer to Bob. In this scenario, I see no advantages to either Bob or Mary. Especially when we’re in such a strong Seller’s Market.
When should a Seller consider accepting a Contingency Contract with a First Right of Refusal?
If Mary has a solid contract on her house before she makes an offer to Bob, then Bob should consult with his Realtor about whether or not he should accept Mary’s offer. While there are no guarantees in real estate, Bob’s Realtor will have the ability to determine the strength of the offer on Mary’s current house. If it’s solid, it might be safe for Bob to move forward in accepting a contingency offer.
I’ll be glad to meet you in the comment section below if you have any questions.
And if you want more information about buying or selling a home in Colorado Springs, be sure to text, email or call and I’ll be happy to discuss your particular situation with you.