First Right of Refusal Clause, Option Agreement in Negotiating

Tax Liens & Mortgage Notes
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First Right of Refusal Clause, Option Agreement in Negotiating

Dalia D.
Real Estate Broker · Bellingham, WA · Member since 2018 · 27 posts · 0 votes

Thank you BiggerPockets,

 Live in Bellingham WA and am a RE Broker aspiring to become a passive note investor for multiple income streams. I am learning to broker notes right now. Have a few questions regarding document prep on note transactions.

1. Would this be appropriate wording for a first right of refusal on a Deed of Trust seller-finance transaction?: "The trustor grants to the beneficiary (me - note holder) an irrevocable option to purchase the property, including all contents except for personal property (chattel), for the sum of ONE DOLLAR ($1.00) upon being offered for sale or upon the death of trustor (borrower's/buyer's name)"

2. Should the words "First Right of Refusal" be written in the Deed of Trust and in the Purchase and Sale Agreement?

OPTIONS:

3. When I find a note deal to purchase or broker how elaborate (details and expiration time) should the Option be to take care of the due diligence process? - Searching/marketing locally and with Self-Directed IRA and LLC money, so I am thinking that 30 day Option would be sufficient to research and negotiate price and terms.

4. How much consideration (money) should I offer as an option?

Thank you in advance. Suggestions are always welcome and appreciated. 

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  • Ken Rishel
    Specialist · Springfield, IL · Member since 2011 · 700 posts · 479 votes
    6y

    When we actively selling new homes as a retailer for homes placed in a related land lease community we offered lower prices on the sale of the home in return for the right of first refusal. It was far greater than $1.00. The thing to remember is that Judges get to make the decision on enforceability and they are likely to consider the equability of the trade of rights for the offer of monetary gains.

    Many major operators in Michigan learned the error of their ways via the courts and an expensive lesson it was. 

    Each state has it's own laws.

    California:

    SENATE BILL SB 237 BY MIGDEN PROHIBITS AGREEMENT TO INCLUDE RIGHT OF FIRST REFUSAL FOR PARKS TO BUY YOUR HOME
    Senate Bill SB 237 prohibits a rental agreement in a mobilehome park entered into or renewed on or after January 1, 2006 from including a provision that would grant the management of the park the right of first refusal to purchase the homeowners’ mobilehome for sale to a third party. Specifically, this bill provides the park owner or management and homeowner of a mobilehome park may enter into a separate agreement which would grant the park owner or management the right of first refusal.

    There are approximately 4,850 mobilehome parks and manufactured housing communities in California providing spaces for an estimated 675,000 residents. According to the Senate Select Committee on Mobile and Manufactured Homes of the rental agreements their office has reviewed in the past, an estimated one third include a clause granting the park management a right of first refusal to purchase an owner’s mobilehome. A right of first refusal in a rental agreement requires the mobilehome owner to inform the park when they receive a legitimate offer from a third party and provide the park a copy of the offer and a period of time to respond with a matching offer. If the park chooses not to match the offer the homeowner can accept the offer from the third party if they are still interested.

    According to the sponsor this bill is needed to prevent abuses that arise when rental agreements give park owners the right of first refusal. Prospective buyers may be deterred because of the delay caused by the park’s right of first of refusal could range up to 10 days. Additionally, in mobilehome parks the buyer of a mobilehome must negotiate the rental price of a space with the management while simultaneously purchasing a mobilehome from an individual in the park. In a park in which the management has a right of first refusal, the park could abuse this relationship by offering unfavorable lease terms and making the purchase of the mobilehome less attractive to drive the purchaser away and the price of the mobilehome down.

    Supporters also argue the park owner has an interest in including the right of first refusal in their leases to guarantee their ability to purchase the mobile homes in their park. 

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    6y

    @Dalia D.

    1. Right of first refusal being in the deed of trust opens the door to an “under duress” legal argument. A right of first refusal should be in a separate document.

    2. The right of first refusal is mostly relevant in commercial property where a tenant has his location specific business. It serves little purpose otherwise as all it accomplishes is allowing the option holder to buy a property at market price.

    3. Purchase of existing notes are handled different ways. I want as much relevant information as possible before I make an offer. Once I make an offer I Place a relevant amount of earnest money with an escrow/title co. and will close 7 days after I receive documents specified, or if title insurance is necessary after obtaining clear title. Depending on the circumstances surrounding the creation of the note, the state the property is located in, and the size of the transaction, title insurance may or may not be necessary.

    Private Mortgage Financing Partners, LLC
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  • Dalia D.
    OP
    Real Estate Broker · Bellingham, WA · Member since 2018 · 27 posts · 0 votes
    6y

    Thank you Ken and @Don Konipol. 

    1. Thank you for the "under duress" caution with a first right of refusal.

    3. So Don, my understanding is that an Option is a one way agreement in which the buyer has full control (to purchase) and is usually initiated to "buy time" - such as in the case of a feasibility study for commercial property. So with a note purchase, if buyer is in a situation where they need a couple of weeks to work a deal, is an Option a fair document to draw up if the seller agrees?

       and do you find that the earnest money for notes is similar to what is customary for the purchase of real estate property in a specific area (~.5% of listing price or starting at $1K-$2K)?  Thank you sharing.

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