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right of first refusal real estate

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									Right of First Refusal and Resale Restrictions By: Heather K. Way, Texas C-BAR Legal Aid of Central Texas, 2201 Post Road, Suite 104, Austin, Texas 78704 www.texascbar.org; e-mail: txcbar@lact.org I. Overview

A right of first refusal is one legal tool a nonprofit can use to preserve the affordability of a home after it is sold to a family. The right of first refusal restricts the ability of the homeowner to sell the home by giving the nonprofit the right to buy back the property should the homeowner decide it wants to sell the home to another person or entity. Rights of first refusal are more widely used in areas where real estate values are rapidly appreciating. For example, assume a nonprofit sells a home to a first-time home buyer for $80,000, with $20,000 in subsidies. Five years later the family decides to sell the home, which now has a market value of $120,000, making it unaffordable to the low income families that the nonprofit serves. If the nonprofit had executed a right of first refusal when selling the home, it could then preserve the right to repurchase the home for a discounted price, or by matching any bona fide offer. Rights of first refusal are often used by governmental entities providing subsidies through federal programs such as the HOME program. II. How a Right of First Refusal Works

An important decision for the nonprofit is how to structure the right of first refusal by determining the formula for the discounted price for which the nonprofit can purchase the house back from the homeowner. There are several different ways to design this formula, which involves important policy issues that need to be approved by the governing board of a nonprofit, including making sure the resale formula keeps the home affordable but also gives the owners a fair return on their investment. For more information on designing resale formulas for home ownership programs, see “Designing Resale Formulas,” which can be obtained from the Institute for Community Economics, (413) 746-8660. If a nonprofit wants to include a right of first refusal as part of its home ownership program, the nonprofit needs to require the right of first refusal as part of the earnest money contract. The right of first refusal can be included as an addendum to the earnest money contract and should be initialed by all of the parties to the contract. At the closing, the right of first refusal is then signed by the purchasing family and recorded by the title company. When the new homeowner decides to sell the home, the right of first refusal should require the homeowner to contact the nonprofit in writing. If the homeowner does not contact the nonprofit, the right of first refusal--if properly recorded--should appear on any title search for the property and alert the title company and/or lender of the right of first refusal. After notifying the nonprofit, the homeowner is required to show that it has received a legitimate offer to purchase the home. The nonprofit is then given a certain number of days to exercise its right to purchase the property, depending on how the right of first refusal is structured. Page -1-

IV.

Model Right of First Refusal

The following right of first refusal was drafted for an organization wanting to control the resale price of the property for the first fifteen years after sale and, after fifteen years, provides the nonprofit with the option to match any bona fide offer to purchase the property for eight-four years. The resale formula is not included, since this is a very fact-specific choice that depends on a variety of factors. RIGHT OF FIRST REFUSAL

THE STATE OF TEXAS COUNTY OF TRAVIS

§ § §

KNOW ALL BY THESE PRESENTS:

This agreement is made between the [insert nonprofit’s name here]__________________ (hereinafter referred to as the “Seller”) and _____________________________ of Austin, Travis County, Texas (hereinafter referred to as the "Purchaser"). This agreement is made between the Seller and the Purchaser in regard to the following described property ("the property"):

[insert property description here] which property also is more commonly known by its street address, which is _____________________________________. Purchaser agrees that if they or either of them, their successors, heirs, devisees, or assigns elect to convey all or any portion of the real property described above, the Seller shall have the right of first refusal to purchase the property and shall have the right to do so on the terms and conditions stated here. The Seller shall give notice of its decision to exercise or not exercise its right of first refusal to purchase the property to Purchaser within sixty days after receiving written notice from the Purchaser that it has received a bona fide offer to purchase the property from a buyer who has been prequalified by a lender for the amount of the purchase price. During the first fifteen years of the signing of this right of first refusal, the Seller will be entitled to purchase the property by meeting the lesser of any bona fide offer or the price set in the following schedule: Year of Sale Year 1 & 2: [fill in amounts here] Year 4: Year 6:

Year 3: Year 5: Year 7: -2-

Year 8: Year 10: Year 12: Year 14:

Year 9: Year 11: Year 13: Year 15:

After fifteen years and for the following eighty-four years, the Seller has the right to buy back the property by meeting any bona fide offer. Purchaser shall be required to give written notice to Seller that they wish to sell the property and provide Seller with a copy of the bona fide offer to purchase the property. To ensure that an offer is bona fide, Seller shall have the right to require the prospective buyer to demonstrate the financial capability to finance the purchase. In this regard, Seller may require the prospective buyer to provide a prequalification letter from a lender. If, in its reasonable judgment, Seller determines that the prospective buyer does not have the necessary capability, then it may reject the offer on the ground that it is not bona fide. Purchaser hereby agrees that they will not have the right to convey the property to a third party and a third party will not have the right to accept the property if Purchaser fails to send written notice to Seller or, after receiving Purchaser’s notice, Seller sends written notice to the Purchaser within sixty days that Seller wants to buy the property. The right of first refusal as set forth here is subject to any conveyance, including, without limitation, gift, deed, buy/sell agreement, or contract of sale. This right of first refusal survives any change of ownership by devise or inheritance and may not be altered by Purchaser in bankruptcy. If Seller sends written notice to the Purchaser that Seller wants to exercise the right of first refusal, Seller is required to close on the sale of the property within sixty days of providing notice to Purchaser, or the right of first refusal becomes null and void. Any bona fide offer must be in the form of a signed legally enforceable earnest money contract made contingent upon Seller's failure to exercise the right of first refusal. Any attempt to convey the property without giving notice and without the expiration of Seller's right of first refusal shall not be valid to convey the property to anyone or to convey any contractual or other form of right with respect to the property. Purchaser shall mail the notice, by both first class mail and certified mail return receipt requested, to ______________________ at its address at _________________________, or such other address as Seller may designate in writing in the future.

EXECUTED on this _________ ____________________ County, Texas.

day

of

________________________,

in

____________________________________ SELLER [enter nonprofit’s name] ____________________________________ PURCHASER -3-

____________________________________ PURCHASER

THE STATE OF TEXAS § COUNTY OF TRAVIS § This instrument was acknowledged before me on the _______ day of _______________________, by __________________________, ____________________ of the _________________________, a Texas nonprofit corporation, on behalf of the corporation, known to me by his Texas Drivers License, number _____________________. _____________________________________ NOTARY PUBLIC, STATE OF TEXAS

THE STATE OF TEXAS COUNTY OF TRAVIS

§ §

This instrument was acknowledged before me on the _____ day of ____________________, by _____________________________, known to me by_______________________________.

____________________________________ NOTARY PUBLIC, STATE OF TEXAS

THE STATE OF TEXAS COUNTY OF TRAVIS

§ §

This instrument was acknowledged before me on the __________ day of ________________, by _____________________________, known to me

by_______________________________. ____________________________________ NOTARY PUBLIC, STATE OF TEXAS

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After Recording Return To: {enter Seller’s address here]

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