First-Right Offers & Why Nobody Wins

Bear with me through this post, it’s lengthy and may be confusing (you can thank me for not including some of the caveats that would have made it even more lengthy and confusing). However, the topic of first-right offers is something that buyers and sellers should be informed on, so read it.

What is a first-right offer?

Investopedia describes a first right offer as a contractual obligation by the owner of an asset to a rights holder to negotiate the sale of an asset with the rights holder before offering the asset for sale to third parties. If the rights holder is not interested in purchasing the asset or cannot reach an agreement with the seller, the seller has no further obligation to the rights holder and may sell the asset.

In other words, buyer 1 finds a home they fall in love with and want to purchase. However, they still need to sell their own home, so they aren’t able to 100% commit to the purchase. Instead they opt to submit an offer to the sellers stating that for 30-60 days (this would be specified in their offer) they would like to obtain the first-right to purchase the home. The sellers are still able to entertain other offers during this time, but if they decide to accept an offer from buyer 2, the sellers first have to offer the sale to buyer 1. The sellers will notify buyer 1 to let them know of the situation, and will give them a window of time to either move forward with their offer, or let buyer 2 have the home.

Why nobody usually wins in this situation…

In real estate, it’s not likely that something will dually benefit a buyer and a seller. Microeconomics will suggest that if one person gains, the other will lose.  First-right offers go against this and prove to not benefit either party to great lengths. In the small picture, yes, the buyer has their thumb on the home they want, and the seller has somewhat of an offer on the table. But it pretty muchends there.

Buyers who submit first-right offers lose much of their negotiating leverage. If the home hasn’t been on the market long, they may even end up paying more than the list price. Because from a seller standpoint, they are gambling that a better offer could come in so they want the first-right offer to be top dollar. If a buyer is truly in a situation where they couldn’t buy the new home until their existing home sells, this type of offer is usually only good as a means to accrue some stress. If the buyers could actually buy the home if it came down to it, they will still likely accrue some stress, and will probably overpay on top of it.

For sellers the thought of a potential sale is enticing. But keeping it into perspective, buyer 2 is going to see the first-right offer as competition. They know that they are going to have to surpass or come close to the first-right offer price in order to get the home. That is enough to make buyers walk away. Accepting a first-right offer greatly decreases the marketability of your home. Unless you’re late in the game and haven’t had much interest, there’s not a lot of justification for accepting an offer that carries more weight in consequences than in results.

As I said in the beginning, there are caveats and exceptions to first-right offers, but as a rule of thumb, a buyer will over pay and a seller will decrease marketability.

 

 

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