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It is no secret that the world of real estate legal wrangling can be pretty confusing, especially if you aren't an experienced legal expert. Many different types of contracts only differ by a small amount, such as the difference between a real estate option contract and a right of first refusal contract. Let's take a look at how these two types of contracts differ and how each are valuable tools when you want to make the real estate deal of a lifetime.

First, let's look at a real estate option agreement. When you sign a real estate option, you are paying a seller for the right to buy a particular piece of property for a particular set price for a set period of time. Let's say that you are looking at a home in a hot neighborhood and the price being asked for the home keeps going up because of a bidding war. You can ask to create a real estate option that will allow you to pay a certain price for that home for the next 3 weeks. After that three weeks has expired, you lose the right to buy that home for that set price. The seller is under no legal binding agreement to sell you the home for that price and the seller can continue to try to sell the home to other buyers.

Now, with a right of first refusal agreement, you have the legal right to refuse another person's attempt to buy a piece of property. Many people confuse the two of these contracts and assume that the right of first refusal comes with an option contract. Unless you have the right of first refusal spelled out in your option contract, you have to assume that you do not have any way to stop another party from coming in and buying a piece of property that you want.

When you have a right of first refusal contact with a seller, you have the option to buy a piece of property for the same price as another buyer. Let's say that same home that is in that hot neighborhood gets a bid of one million dollars. You then have the right to cancel out that bid and place a bid for the same amount and the seller would then sell the home to you, instead. If you decline your right of first refusal, than the seller has the legal right to sell the home to that person who made the bid.

A seller may enter into a right of first refusal with a buyer if they had a previous working relationship and the seller wishes to give a friend a chance to pay market price for a property. It is a smart way to avoid any accusations of impropriety when it comes to selling a valuable piece of land because the price the property ends up being sold at is determined by the free market, not by any sort of collusion.