Posted about 5 years ago

ROFR is better than an Option

Sometimes a lease and an option to purchase is difficult, as in NC and TX.

ROFR or Right of first refusal is better than an option.

Here is an example of a ROFR.  Use it with a lease.

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THIS IS NOT LEGAL ADVICE, GET AN ATTORNEY.

In the event OWNER intends to offer the Property for sale, OWNER must first offer the Property for sale to HOLDER at a price equivalent to prevailing fair market value. Terms of sale shall be cash or third-party finance, and closing shall be within 45 days.

If the parties cannot agree on what constitutes fair market value, then two appraisers shall be promptly selected, one by OWNER and another by HOLDER. The two appraisers selected shall proceed to promptly determine the fair market value of the Property, taking into consideration its condition, the comparables, and any outstanding indebtedness, liabilities, liens, and obligations relating to the Property. The appraisers shall deliver their respective reports within thirty (30) days. If the two appraisers arrive at different valuations, then these two valuations shall be averaged in order to produce a final valuation. The final valuation shall be binding on both parties. Each party waives the right to contest the final valuation in court. The costs of the appraisals shall be split equally between OWNER and HOLDER.



Comments (14)

  1. @thurman stoddard

    ROFRs don't have a price, they just have the ability to match an offer, so if you give a ROFR to a tenant and you get an offer to purchase, it gives the tenant the right to match that offer

    You could do a lease purchase to a buyer graduates the price according to a formula


    1. @Brian Gibbons

      Do you still get an upfront non-refundable deposit from a tenant/buyer when you give them a lease with ROFR? Does the ROFR justify a 3-5% value of the purchase price like an option contract typically does?


  2. Are there RoFRs with declining values? With the example above its at 100% of the established value. But can it be drawn up that after a year the Lessee has a ROFR at 90% of the established value. Then after 2 years a ROFR at 80% of the appraised value and so forth?


  3. I might add that ROFR are common in commercial real estate agreements like ground leases. 


  4. @Steven Johnson

    In the rental business where you're helping a tenant buyer by the property on rent own in certain states is better than the option if you're in the rent to own advising business

    So Stephen if you are in the rental business and give somebody a rofr and they don't use it, well then they don't use it

    It's all in how you position yourself in the market, I position myself in the market is helping home sellers sell and helping renters stop renting and get into homeownership


  5. Maybe I've missed this some where else, but could you explain where the owner has the obligation to sell? As a tenant/buyer how would I know that you would indeed sell to me 5 years down the road? And if the price goes way up I may not be interested any more. And then are your property manager on this property since its not an L/O?


  6. This is an alternative to rent to own, as Dodd Frank applies to owner occupied owner financing.

    Most would agree that a lease option with rent credits is a financing arrangement, and this comes under Dodd Frank.

    There is no way a ROFR comes under Dodd Frank.

    Hear is an attorney's explination.  http://www.lonestarlandlaw.com/Right-of-First.html

    The botom line: If you are in a court of law, and there is tenant buyer trying to get his option fee back, saying that he was not properly underwritten as per the Ability to Repay Rule (see http://www.consumerfinance.gov/regulations/ability...

    )

    And this tenant buyer is suing as per the penalty for Dodd Frank (36 payments, down payment, attorney's costs, court costs), which can be $40K plus, 

    my point is this:

    Looking at a ROFR instead of an option can keep you out of harms way of Dodd Frank.

    Thanks for your comment on my blog @Jeremy Timko 


  7. @Brian Gibbons 

    What bearing does this have on a REI doing a lease option assignment?  

    I have more questions, but would like to see the answer to this question prior to muddying the waters with items that may not be applicable.

    Thanks.


  8. Welcome, @Jay S. 

    For Texas and Land Trusts, 

    see http://www.lonestarlandlaw.com/Texas-Land.html


  9. When you say land trust does this mean a LLC or is this something you create privately among you (landlord/owner) & the seller, filed down at the county records office. I'm here in Texas & would like to understand in greater detail how this would be structure in Texas.

    Thanks for the article @Brian Gibbons.


  10. Also, under Dodd-Frank, because any kind of lease option will be treated as a disguised sale, you can get you into trouble when trying to evict a non-paying tenant-buyer because he/she should be treated as a home-owner and not as a lessee. Under Dodd-Frank, to legally "evict" a non-paying tenant-buyer you have to foreclose on them. Not many people realize this, especially the tenant-buyers.

    This doesn't happen often, but it is a risk when doing lease-options. As Brian said, the best alternative is to do a ROFR with the lease. To add security to this for all parities involved, it is best to first put the property in a title-holding land trust, in which the seller, the investor (who has a ROFR that has been assigned, as it were, to the tenant), and the tenant (who has the ROFR) are all beneficiaries of the trust. This converts the real property to personal property and affords the greatest amount of liability protection to all involved. 

    The title-holding trust, as first, is a little difficult to get your arms around, but I wouldn't consider doing any deal without first putting the property in such a trust in today's legal climate.


  11. An option in the Dodd Frank era creates a problem for the seller as to the CFPB enforcing Dodd Frank.

    If it sounds like a duck, and quacks like a duck, as you are financing a tenant buyer with rent credits on a lease w option, etc, you COULD be in hot water with the penalty issues of 36 months of payments, court costs, attorney fees and down payment.  Not WILL be in hot water.

    A ROFR is a way to avoid giving an option, coupled with a lease.  It takes the property off the market and gives the tenant the RIGHT to purchase.

    ROFRs come in different flavors but in essence are less dangerous for sellers than options with Dodd Frank, Safe Act et al.

    Thanks for your comment Chris.

    PS See a RMLO and avoid this 36 month penalty when you seller finance.  The RMLO give you a safe haven from possible penalties.


    1. I am wondering if a ROFR can specify a set price? From what I read, it cannot, otherwise it would actually be an option.

      Or maybe you could give a signed sales agreement with the ROFR to a tenant who has a active lease agreement?


  12. Hey Brian, could you take this all the way through in an example? I'm still not sure exactly why you're saying its better than an option nor what type of situation its best to use it. 

    Loving the posts though. Thanks!

    Chris