What is the right of first refusal in real estate?
How does a right of first refusal work in New York City?
We’ll demystify this topic in the following video.
I'm Nick at Hauseit, visit our website www.hauseit.com to save money when buying or selling real
estate here in New York City.
So, let's get started.
So, what is the right of first refusal?
Well, the right of first refusal gives a condo board the right to purchase an individual
unit for the same price agreed upon between a seller in the building and a prospective
purchaser.
The right of first refusal is a privilege that is rarely exercised by condo boards primarily
because it is exceedingly difficult to raise funds either through a special assessment
or a loan to be able to purchase what is generally and usually a multi-million dollar condo in
the city.
Furthermore, even if it were possible to raise the funds there would likely be severe opposition
against the board for most condo owners in the building.
The right of first refusal exists to protect condo owners in the building from below market
value, non arms-length transactions or it could be to protect owners in the building
from a crazy person selling their apartment for half its market value.
For example, no owner would be happy if one of their neighbors decided to sell their apartment
at literally half its market value to their family member or in the case of a crazy person
because they don't know what they're doing or what the property is worth.
Doing so may legitimately confuse future buyers that the deal was in fact a real comparative
transaction and this would lower potential sale prices for everyone's apartments in the
building.
Can condo boards abuse their right of first refusal in New York City?
Well, the answer is sometimes.
A condo board typically has 30 days to respond with a right of first refusal after the condo
purchase application has been submitted by the buyer.
However, if the condo board requests additional information say on day 28, the 30-day time
limit starts all over again once the buyer submits the requested information this is
the case even if the condo board maliciously asked for something trivial or for something
that was not even in the original condo application instructions.
And by doing this, the condo board can frustrate a potential buyer and perhaps even force the
buyer to abandon the deal altogether due to a rate lock expiring on their loan or just
out of pure frustration.
So, you may be wondering have condo boards ever exercise their right of first refusal
in New York City?
The answer is yes, although the chances of a condo board being able to scrape together
enough funds to purchase a costly New York City condominium are exceedingly slim.
The only case we've actually heard of where a condo board exercised its right of first
refusal was for an Upper Manhattan condo that was priced just under 1 million dollars so
that buyers could avoid paying the mansion tax.
The buyer put an offer in of $920k and for some reason the board was able to scrape together
the funds to buy the apartment.
Perhaps the board felt that the price was too low or that it was undervalued for some
reason.
The buyer ended up raising his offer to $950k in order to stave
off this exercise of the condo board's right of first refusal.
Remember that the condo board can only exercise it and buy the unit at the same terms as a
prospective buyer.
However, the condo board raised the funds and exercised its right of first refusal anyway.
In the end the condo board ended up flipping the condo a few months later for around $1.1
million.
However, with closing costs in New York City as high as they are the condo board did not
make a profit.
Talk about a strange exercise in futility what a waste of time and energy by that condo
board so it's very infrequent to see the right of first refusal being exercised in practice
and most of the time it's a very bad idea for condos to utilize it.
Nonetheless it's a procedural consideration that we must take into account as we work
with buyers in the city or if you're a purchaser you must think about this additional timeline
when it comes to thinking about when you're going to be able to close on your purchase.
So, we hope you found this video helpful.
I'm Nick it Hauseit, visit our website www.hauseit.com to save money when buying or selling real
estate here in New York City and if you like this video do us a favor hit like, subscribe
or leave us a comment.
We greatly appreciate it and we hope to see you on the next one!