In many real estate transactions, a buyer's offer is fairly simple. They'll offer to pay a certain amount of money for the property, and will usually include a number of contingencies to go into effect later, such as a home inspection and appraisal to scrutinize the home's condition and value. Once the seller accepts, the two parties can move toward closing the deal and transferring ownership of the property.

At other times, a buyer might be interested in a home but have some reticence about making an offer. In these scenarios, a right of first refusal clause can give them an advantage in purchasing the property while giving the seller the option of considering other offers.

Right of first refusal works as an agreement between the seller and a potential buyer, and is often established before the seller puts the home on the market. Tara Mastroeni, writing for the National Association of Realtors, says this agreement allows the seller to actively seek other buyers, but also requires them to inform the person with right of first refusal if someone else makes an offer.

At that point, this person has two choices. They can either agree to purchase the home at the same price and with the same terms as the other buyer put forward, or they can decline. If they choose the latter option, the seller is free to accept the offer from the other buyer.

There are several situations in which a person might be interested in right of first refusal. A landlord may include a right of first refusal clause in their tenant's lease, so the tenant has the option of buying the property if the landlord decides to sell. Homeowners associations or condominium boards may include a similar clause to review an offer. A relative of the seller may ask to have right of first refusal when a family member is selling a home.

Right of first refusal is also a common way for buyers to balance the purchase of a new home with the sale of their old home. It can sometimes be difficult to time these transactions, especially if a buyer is having a hard time selling their property. Elizabeth Weintraub, writing for the financial site The Balance, says a seller may choose to give a potential buyer right of first refusal and actively market their home while the potential buyer tries to find someone to purchase their own property.

If the seller gets another offer as a result of these efforts, they will then alert the person who has right of first refusal. The agreement typically establishes some period of time, usually a matter of days, in which the person with right of first refusal must decide whether they want to purchase the property.

This situation can often present buyers with a difficult choice: they can either lose the opportunity to get their preferred home, or they can make the purchase without funds from their own home sale – and a second mortgage to maintain. The buyer may have to look into other options, such as getting a bridge loan or making a smaller down payment, to keep their payments affordable until they can sell their property.

One disadvantage to the right of first refusal is that it can delay a home sale. Valerie Zinger, a Canadian home organizer writing for the real estate community ActiveRain, says this can create a domino effect, especially if the seller also has a right of first refusal on another property they are considering buying.

If a person with right of first refusal chooses to exercise the option to buy the property, it can be particularly annoying for the real estate agent representing the buyer whose offer triggered the clause. After all, that offer is the reason for the home sale but the agent gets none of the commission. For this reason, some agents may demand that a seller sign an agreement to provide some compensation if this situation occurs.

Right of first refusal can be a good compromise between a seller and a potentially interested buyer, but the agreement needs to be considered carefully. Mastroeni says you should consult with a real estate attorney when crafting this contingency and make sure you understand it completely before agreeing to it.