In processing applications for FHA condominium project approvals, it is not uncommon to find legal documents that have a Right of First Refusal. Often, I have been asked by Board members and property managers if this deed restriction is acceptable to FHA. Most of the time, it is.
A Right of First Refusal is a restriction on conveyance of a unit in a condominium project. It provides the association with the first option to purchase a unit that is being sold.
The Right of First Refusal mandates that upon entering into a bona fide contract for purchase, the unit owner would have to notify the association through the Board of Directors of the contract. The Board, on behalf of the association, would have the right to purchase the unit under the same price, terms and conditions contained in the purchase agreement.
This is not to the detriment of the seller because the association would have to purchase the unit on the same terms and price of the original contract to the third-party buyer. Because of this, FHA does not take issue with a Right of First Refusal.
However, the language has to be very clear as to what the Board is allowed to do under this clause. If the Board only has the right to deny the purchase to the third-party buyer so that the association can purchase that unit that is OK.
But, if the Board, on behalf of the association, has the power to accept or reject purchase contracts for any other reason, this is not acceptable to FHA. FHA does not allow for a Board to approve purchases or buyers. This violates “free assumability” as stated in 24CFR203.41.
To date, every condominium project with whom we have worked that has had a Right of First Refusal clause has been approved with FHA.
As an aside, Fannie Mae also allows Right of First Refusal. The VA does not.
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