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Right of First Refusal.

What is it? Why is it a problem?

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:

 

  • Ethical Considerations: When sellers list their property for sale on the open market, they are indicating to the public that they truly intend to sell the property to the public. The action of listing and then selling internally (between the parties), may be an ethical violation to the Realtor involved, not to mention what it does to the parties involved. As for the Realtors®️ they are to uphold the National Association of Realtors®️ Code of Ethics & Standards of Practice. In particular, Article 12 of the Code of Ethics & Standards of Practice talks about misleading information that does not present a clear and accurate picture of the listing. This is where those involved might have concerns over the misleading information they recieved through sources. 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. 
  • 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 process.
  • 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. 

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. 

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