What is a Right of First Refusal in New York City? (2021)
Go Back To Previous PageWhat is a right of first refusal (ROFR) for condo boards in New York City? Read on, and we’ll let you know all about it. And how it can affect you if
you buy a home in the city. In New York City, co-op boards are notorious for scrutinizing potential shareholders. Condo boards operate differently. They have limited power to thoroughly review a potential homebuyer’s finances. Also, they typically don’t conduct onerous board approval interviews. This works in the potential buyer’s favor. The condo board leaves them with little say in who is purchasing an apartment in their building. But that’s a myth. Why? Because a condo board in New York is not as lenient as many homebuyers think. Real estate agents and insiders know this. But you don’t often hear of it.
Nearly every condo in New York City has a right of first refusal (ROFR) clause in its bylaws. This allows it to preempt your condo unit’s sale and purchase it for the same price you and the buyer agreed upon. So, what is a right of first refusal in real estate, and how does it work in New York City?
- What is a Right of First Refusal in real estate?
- Does the Right of First Refusal Happen Often?
- Does a Right of Refusal Protect Condo Owners?
- Why Would a Condo Invoke the ROFR To Buy A Unit in Their Building?
- Can a Right of First Refusal Bar a Prospective Homebuyer?
What is a Right of First Refusal in real estate?
What does the first right of refusal mean? A right of first refusal gives a condo board some control over the sale of a unit in the building. This means the condo board can deny your pending sales agreement with a buyer. The board can purchase your unit at the same price you and the home buyer have settled on.
The board has a limited amount of time—30 days—from when the sales agreement is signed to match the sale price of the condo unit between the seller and the buyer and use their funds to purchase it. Furthermore, the right of first refusal can effectively discourage a potential buyer from buying a unit in the building.
Does the Right of First Refusal Happen Often?
Condo boards rarely exercise the right of first refusal. It is challenging to raise money or secure a loan to purchase a unit in a building, and the condo can also be at risk if it can’t close on the purchase.
Furthermore, a board rarely exercises its ROFR because owners in the building often oppose the board’s actions. Besides, the condo’s bylaws are designed to discourage ROFR. Finally, a ROFR can create a divide between the condo board and the seller and even lead to a legal dispute.
In general, the condo only exercises its rights in extreme cases.
Does a Right of First Refusal Protect Condo Owners?
Yes, a board sometimes uses its ROFR to protect owners by intervening in low-comp sales. The ROFR can help the condo board step in and make
money on a resale. This is when they see a unit sold at a price below market value in their building. The ROFR can prevent the sale from going through, preserving the pricing of their other units.
For example, condo owners wouldn’t be delighted if a neighbor decides to sell the property at half its market price to a family member. That’s because a low purchase price can affect the financial integrity of the entire building. Indeed, the sale goes through and becomes a sale of record.
This can significantly affect comps and lead banks to assume that a unit’s low purchase price reflects the costs of the other units.
A low sale means low appraisals throughout the affected building. And this leads to low comps, which in turn can tarnish current unit owners’ resale values. The board can prevent a low sale if it buys the property, as it has the right to pay the seller the same amount.
It invokes the right of first refusal and then sells the unit at a higher price. The board keeps profits in the condo board’s reserve funds.
If a stringent real estate agent can negotiate a unit sale at an affordable price, the condo board cannot reject the prospective homebuyer. The condo board can only deny you if you invoke the ROFR and purchase the property yourself.
Why Would a Condo Invoke the ROFR To Buy A Unit in Their Building?
The homeowner association can exercise its ROFR by purchasing units because it needs them for specific reasons.
The board may need space for the superintendent to live. Another example is that the board can use it to benefit the building’s owners. As an
illustration, a board can turn the apartment into a common area. The board can also use it to generate income if it rents out.
Furthermore, the building can reserve the unit for event space.
Can a ROFR Bar a Prospective Homebuyer?
The ROFR clause or ROFR agreement can be invoked if the board considers a homebuyer undesirable. The ROFR can also protect the condo if the prospective homebuyer’s financials are subpar or lacking.
In this way, the condo board is similar to a co-op board. The board will likely do a full background check on the buyer to see if there are any skeletons in the closet. If it turns out that the homebuyer has a violent criminal record, then the condo would most likely exercise its right of first refusal.
But a condo can’t invoke the ROFR to discriminate against people of color, mental or physical disability, or age. A condo can also invoke the ROFR only if an interested buyer purchases a unit in the apartment without the board even knowing it. In this case, the condo may have to resort to litigation to prevent the sale.
The buyer can also sue the condo. Let’s say the buyer has a violent criminal record, and the board blocked the buyer from purchasing a unit.
In such a situation, taking the condo to court is lengthy and can cost money. The buyer is better positioned to move onto another building because proving that the board had discriminated against him is complicated.
