Condominiums should remove their 30 day right of first refusal

By
Real Estate Agent with Keller Williams Realty Professionals

An esteemed colleague of mine wrote today:

I have a deal on a listing where the buyers are going FHA. The only thing holding is up is that our condo docs have a 30 day first right of refusal! and the FHA sees this as discriminatory. So, we are trying to convince the 8 owners to amend the docs to remove the clause, and we have a lawyer lined up ready to do this if we get a 100% vote.

Here is the help I need....Can anyone share your opinion on this 30 day first right of refusal, why they originally were put into 99% of all condo docs, what benefit it really IS to owners or an association, and or if you have EVER known any association to utilize this right? and how it even benefits? and then on the flip side, how it would, if at all, HURT a condo association to LOOSE this 30 day FROR?

As my research shows so far, this clause is holding up not only FHA and VA loans, but also now even conventional loans when it comes to lenders viewing a property as warrantable or non-warrantable. And we all know how tough it is for buyers to get financing right now, so we are feeling that to REMOVE this 30 day FROR, is actually a future benefit to owners who hope to have every chance to sell in this market and for a while yet to come!

Condominiums evolved after co-op's. It seemed in the 1970's, that condo associations wanted to emulate the kinds of policies of co-op buildings. And one of those policies was the right of first refusal. Historically, in co-op buildings the right of refusal really was discriminatory. In New York, there are still some co-op buildings that do not allow black people or Jewish people to move into the building. The way they enforce those policies is the requirement of very high down payments, or no financing permitted at all. Sometimes, co-op boards simply don't give a reason why they don't approve a prospective tenant.

But in the condominium act, the most powerful way an association could exercise their right to make sure no "undesirable" people moved into the building, was with the right of refusal.

These days, the requirement seems rather Victorian. Right out of a different time, or era. And it is. Since the right of refusal is historically used to ensure that a condo board can control who can and cannot move into the building, the FHA rightly categorizes the policy as de-facto discrimination and won't allow FHA financing in the building.

There is no downside to removing the right of refusal. As a practical matter, as the laws have evolved, it is now a requirement that an association that exercises its right of refusal must BUY THE UNIT under the same terms as the contract with the rejected buyer. There are very few condominium associations that have the resources (i.e. cash) to buy a condo to prevent an undesirable resident from moving in. And the fact that a prospective resident has either qualified for a mortgage, or paid cash for their unit, means that the meet the financial requirements for being able to meet their monthly obligations to the association.

Very few new condominium associations are written with a 30 day right of first refusal for the association as the policy is mostly unused in this day and age. And given the economic situation and its impact on the real estate market, a home owners' association would be wise to aggressively pursue amending their declarations to remove the policy from their declarations.

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