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Caroline C.
  • Rental Property Investor
  • Southern California
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Is there such thing as selling a Right of First Refusal?

Caroline C.
  • Rental Property Investor
  • Southern California
Posted Dec 10 2018, 16:33

I have two adjacent SFR rental properties with lots that combine to 40,000 sf. I'll sell it sometime in the next five to ten years because I will need the money to buy my siblings out of our parents' home when the time comes. Meanwhile, I'm trying to scare up some cash without giving up income property or borrowing.

My new neighbor is a very successful spec home builder who typically acquires little old lady houses on huge lots in good areas, razes the land and then builds a PUD with 4 to 6 houses or one very large, expensive house. He cleans up, time again because he is the builder as well as the investor, with a reliable crew, all kinds of contacts and relationships with the city, and experience from when he wore short pants onwards. (His father got him started, in other words, and his recently deceased father is a local legend.) He swiftly razed his new 40,000 acquisition and erected a massive house, installed a giant pool, and threw in a commodious guesthouse that is, for real, bigger than the houses on either side of him. Then, to my surprise, he and his family moved in.

I think I can leverage the desire he much have to pick up my lots if they ever become available. I don't want to sell him an option to buy because I don't want to be obligated to sell, in case my situation changes, much less to sell in the future for a price that is determined in the present.

I would like to offer him a Right of First Refusal such that, if/when I decide to sell, I'd inform him ahead of all others. If he wanted to, he could write up an offer and we could negotiate until we either made a deal or decided that we couldn't. He gets a crack at it before anyone else, I'd retain the seller's right to accept or reject his offer(s), and I would not be obligated to sell at any particular time. I assume he could deal with my estate if I were to die without having sold it to him.

Is that something that is routinely done? If it isn't, does it seem do-able? 

How would I go about putting a value on such an agreement? A lot would depend on the strength of his desire to build up an 80,000 sf compound, obviously, and I could always ask him to make an offer instead of making him an offer first. But even so, I'd  want to know that I had squeezed every available dollar out of the deal .

Would the price be grounded in an estimate of what my properties are worth, or an estimate of what he'd make building a spec house? Might I learn find out what experienced ROFR-sellers do in a time-honored, yet recently updated, book called something like "Selling ROFRs on Real Estate Because You're Broke and You Can't Borrow Because of that Pesky Chapter 11 Bankruptcy, not to Mention Your Pathetic, Lazy-A%% Income"?

More crisply, what is a ROFR is worth to a nextdoor neighbor who'd love to have control of what's next to his fancy spread and who could build a $3,000,000+ house on the land, very efficiently,  with his eyes closed (and not have to drive to the job site)?

Ah--one last thing. In our city, there are not many lots of even 20,000 sf, much less 40,000. And my lots were once a single property, so can be re-joined as if they had never been separated, as long as the same party owns both of them.

Thanks in advance for your thoughts.

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