Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
What 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 review a potential homebuyer’s finances thoroughly. Also, they typically don’t conduct onerous board approval interviews. This works in favor of the potential buyer. 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 the right of first refusal (ROFR) written into 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 does the first right of refusal mean? A right of first refusal allows a condo board to have some controlling power over selling 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 the home buyer, and you 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 purchasing a unit in the building.
Condo boards rarely turn to the right of first refusal. It is challenging to raise money or get a loan to purchase a unit in their building. It can also engender risk for the condo if it can’t close on the purchase itself.
Furthermore, a board rarely exercised ROFR because owners in the building would oppose what the board is doing more often than not. And besides, the condo’s bylaws are designed to discourage a ROFR. Finally, the ROFR can cause a divide between the condo board and the seller and even result in a legal dispute.
In general, the condo only exerts its right in intolerable cases.
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 below market value in their building. The ROFR can prevent the completion of the sale from going through to preserve 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 his 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 the low purchase price of a unit represents 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 sale of a unit at a very affordable price, this doesn’t mean the condo can reject the prospective homebuyer. The condo board can only deny you if they invoke the ROFR and purchase the property themselves.
The homeowner association can exercise its ROFR by purchasing units because they need them for specific reasons.
The board may need space to give the superintendent a place to live. Another example, 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.
The ROFR clause or ROFR agreement can be invoked if the board feels that a homebuyer is undesirable. Also, the ROFR can protect the condo if the prospective homebuyer’s financials are sub-par 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 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 also can’t invoke the ROFR 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 take the condo to court. 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 very difficult.