Right of First Refusal in NYC Explained
What is the Right of First Refusal in real estate? How does a Right of First Refusal work in NYC? A Right of First Refusal is a typical requirement in a condominium’s By-Laws which allows the condominium corporation to purchase an apartment at the same terms as a buyer who has already signed a contract to purchase the apartment.
What Is a Right of First Refusal by Condo Boards in NYC?
The Right of First Refusal is a privilege that is rarely exercised by condo boards primarily because it is exceedingly difficult to raise funds either through a special assessment or a loan to be able to purchase a multi-million dollar condo in NYC. Furthermore, even if it were possible to raise the funds, there would likely be severe opposition against the board from most condo owners in the building.
This could result in unnecessary litigation within the building which costs everyone money, uses the building’s reserves and destroys the marketability of the building!
The Right of First Refusal exists to protect condo owners in the building from non “arms length” transactions at off market prices between friendly parties. For example, no owner would be happy if one of their neighbors decided to sell their apartment at half its market value to their family member.
Doing so may legitimately confuse future buyers that the deal was a real comparative transaction which would lower potential sale prices for everyone’s apartments in the building!
Have Condo Boards Ever Exercised Their Right of First Refusal in NYC?
Yes, although the chances of a condo board being able to scrape together enough funds to purchase the average $2 million New York City condominium are exceedingly slim.
The only case we’ve heard of a condo board actually exercising its right of first refusal was for an Upper Manhattan condo that was priced just under $1 million so buyers could avoid the Mansion Tax in NYC.
The buyer put an offer in of $920,000 and for some reason the board was able to scrape together the funds to buy the apartment. Perhaps the board felt that the price was too low, or that it was undervalued for some reason.
The buyer ended up raising his offer to $990,000 in order to stave off this exercise of the condo board’s right of first refusal (remember that the condo board can only exercise it and buy it at the same terms as the prospective buyer of a condo unit).
However, the condo board raised the funds and exercised its right of first refusal anyway. In the end, the condo board ended up flipping the condo a few months later for around $1,100,000. However, with closing costs in NYC as high as they are, the condo board did not make a profit.
Talk about a strange exercise in futility! What a waste of time and energy by that condo board!
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