First Right Tyranny

Friday, 10 May 2013
 Many condominium associations in Florida and the Cocoa Beach area have provisions in their documents that give members of the association (unit owners) the right to take over a contract for sale of another unit. The way this happens in most cases is that an owner first negotiates a contract for the sale of his unit with an outside buyer. Then the contract is offered to the other unit owners at the same price and terms. In some condos, the contract is mailed to owners and at others a notice or a copy of the contract is just posted on a bulletin board at the complex. The method varies as does the time limit for stating intentions. In most area complexes, owners have between 10 and 21 days to state their intention to exercise their first right and take the contract. If this happens, the original buyer is out and any money spent on inspections and appraisal is gone as well. Not fair but that's how it is.

Should more than one owner want to take the contract we have to go back to the docs to see who has priority. Again, the rules vary and we have several methods for determining priority. Some associations give priority to contiguous or adjacent units with priority usually favoring horizontal over vertical (I did not plan that ironic wording). Others give priority to the closest (numerically) unit number. Most, in the case of a tie, give the seller the right to choose. Acrimony is a not uncommon byproduct.

I have always heard that first right was initially a way for owners in a small community to legally discriminate against unwanted buyers. Should some "undesirable" try to buy in their community, one of the existing owners would just use his legal right to take the contract and prevent the undesirable from buying into the community. In my experience in the Cocoa Beach area that has never been the case. What is more common is that an existing investor owner will take any contract of a desirable unit unless the contract price is well above market. In practice that means that no outsider can buy in the complex unless he is willing to take an undesirable unit or overpay for a desirable one. That situation exists in a handful of units in our area.

Let's talk about short sales in first right complexes. The process can be quite perverse.When a seller of a short sale property signs an offer, the bank/s holding the mortgage must still approve the sale. The question for a short seller in a first right complex then becomes "do I submit this signed but unapproved contract to the association for first right, or do I wait until the bank approves the sale?". If the seller submits to the association before bank approval a couple of different problems can arise. Scenario 1: An owner exercises first right but the bank counters at a higher price than the contract the seller signed. The exercising owner then walks away and seller is back at square one with the original buyer long gone. Scenario 2: No owner exercises and bank counters at a higher price. Original buyer accepts the bank's counter. Because the contract has changed the contract must be submitted for first right again. An owner chooses to exercise their right and takes the contract. The bank refuses to transfer approval to a new buyer which means the short sale negotiations must start over at the beginning with no guaranty that the same price will be approved.

If the seller decides to wait until approval by the lender to submit to the association then other problems are lurking, one almost identical to scenario 2 above. I am involved in a situation like this right now with one of my contracts. The seller signed the original $35,000 offer from my buyer client for a small 2/1 Cocoa Beach condo in early September last year. Bank finally approved the short sale at the $35,000 contract price with $2000 seller contribution in January this year. The contract was then submitted to the association for first right and an existing owner took the contract. The bank refused to transfer the approval and the short sale negotiations had to be restarted. The bank responded in April with an approved price of $51,500 and $7000 seller contribution. That's $21,500 more than the approved amount in January. If we can't get the bank to accept a lower price then this owner/buyer will walk and everyone loses.

If you are a buyer of a short sale in a first right complex, be sure to ask your agent when the first right procedure will take place and be prepared for craziness and an illogical progression of events. Now that I think about it, you probably want to know, short sale or not, whether the unit you're offering on is in a first right complex. It might prepare you for the possible disappointment. Whatever your situation, may the force be with you.

"Animal Sounds"; "Condiments"; and finally, "Your Ass or a Hole in the Ground". Mr. Reynolds, unfortunately you're in the lead, so we'll start with you. __Alex Trebek as played by Will Ferrell