RIGHT OF FIRST REFUSAL

Recently, we were sitting in a mortgage refinancing for a cooperative corporation. The board president raised the topic of rejecting a buyer because the price for the apartment was too low – $140,000, maybe $150,000 below market.

Our eyes lit up. "Would the board buy this apartment at the same low price as the rejected buyer would pay?" we asked. The president shrugged, "Sure." A right of first refusal had just been exercised, even though the president did not know it at the time.

One of us (Samson) called the seller's attorney and notified him that the buyer had been rejected. After much aggrieved arguing, the seller's attorney then uttered the magic words: "Well, if they think the price is so low, why don’t they buy it?"

And so the co-op did – and resold the apartment for a $135,000 profit, tax-free, which it used that to finance its Local Law 11 project.

Many other buildings have done likewise. In fact, too many buildings have benefited from exercising their ROFR to view these opportunities as unique or even rare. Here's how you can do it, too.

The Basics

Most condominiums have ROFR built into their bylaws. A few co-ops also have a formal ROFR. But even if you don't have one, the opportunity to buy an apartment and resell it at a substantial profit still exists. Even in the hottest real estate market, opportunities arise when a board observes a sales price that is substantially below market, such as likely to occur in insolvency, foreclosure or estate sales. But there are enough ordinary transactions with low prices that you should constantly be vigilant for opportunities.

We would not recommend exercising ROFR for an apartment being sold at 90 percent of market value. The return is too small to justify the effort and a delay in reselling may destroy any profit. On the other hand, a sale at 25 to 35 percent below market offers a significant opportunity, if the apartment doesn't require extensive renovation. (Inspecting its condition is essential.)

So what steps should a board take when presented with a sale at 50 percent below market, apartments are selling briskly in the building and the board has access to cash?

Condo Conundrum

If you're a condo association, with no ROFR already in the bylaws, you're out of luck: The board has no authority to demand that the apartment be sold to it at the same price. If your building has no ROFR, create one. (See "Amending for ROFR.")

When the bylaws do allow for ROFR, make sure they spell out the method by which the board of managers may exercise it. Most condominium bylaws require a unit-owner vote before the ROFR can be exercised. The board has no power to exercise the right – only to waive it – and a quorum of unit-owners may be difficult to obtain. The board should instead consider seeking an amendment to its form of power of attorney (which is given by each unit owner) to permit the board to use power of attorney in order to exercise ROFR.