Actually you should be giving him first right of refusal.
You can exclude James from the listing agreement. In other words, you will include a clause in your listing agreement that no commission will be paid if James purchases the home. Or, if you are still going to use her to handle the sale, even if you sell to James, you could include a clause that stipulates that if James is the buyer she gets a reduced commission.
Do you know what the house is currently worth? You might want to pay to have an appraisal done before you list it, and offer it to James at that price. If he doesn't want it, then you could have your Realtor list the house.

Thanks, Terricks. We were going to get an appraisal but decided that the REA would know what price to set for the house. But maybe we should get the appraisal and contact James, as you suggested.

I am assuming James wants last refusal so that he can top the highest price offered. This was how he put it in his email:

"Yes, I reserved/requested right of LAST refusal, not first, so do keep me posted as things unfold and develop. Who knows?"

So that's where we stand at this point. We want to get the house up for sale soon because spring is the best time, especially for a vacation house.

I don't get it. I know what first refusal is, but last? Does that mean "James" expects you (and your realtor) to go through the trouble and expense of finding a qualified buyer and then he swoops in and (presumably) tops that offer? Sort of like sniping on eBay?

While it is possible to exclude someone from the listing agreement's commission schedule, it doesn't seem fair to a potential agent to exclude a particular potential buyer who intends to top any other valid offer. Good for the sellers, perhaps, but a very bad deal for the agent - and a not so good deal for other potential buyers who are merely being used as stalking horses.

Best bet is to get an appraisal and make an sales offer to "James". If he doesn't want to go for that price and you still want to sell to him, you could suggest that he pay for second appraisal, and then if the appraisals are still far apart, you could (jointly) fund a third appraisal to resolve the valuation question. The three-appraisal method is sometimes used in settling valuation disputes in inheritance or emminent domain matters. It only works if both parties are determined to settle on a price and proceed to closing. The cost of an appraisal (even paying for 1 1/2 appraisals each) is almost certainly less than a real estate commission. If James is really serious about repurchasing the property for a fair (to both parties) price, and not just wasting everyone's time, he shouldn't object to arriving at a sale price in this way. If he thinks the appraisal you paid for is wrong, then he gets a chance (at his expense) to provide another data point and you both have a way to further resolve any differences.

You might point out to James that if he intends to top any offer that the REA scares up, he will be in effect paying for the amount of the commission anyway. In some circumstances if a REA finds a fully qualified, full-price offer that a seller refuses, the commission is still owed.

It sounds to me more like James is hoping the property doesn't sell and he can pick it up for a bargain price due to the sluggish market.

"It sounds to me more like James is hoping the property doesn't sell and he can pick it up for a bargain price due to the sluggish market."

So you think that 10 years ago, James hatched a plan to accurately predict and then capitalize on massive economic meltdown?

If he really wants to buy the house and you really want to sell the house, all that is left is coming up with a fair appraisal. Don't involve an agent. Come to an acceptable agreement on price and then hire a lawyer for the paperwork.

what Bill said...
Personally, I would give James the first option to buy the house. His "reserve the right of LAST refusal.." is it in the sale contract from when you bought the home?

if not, his reserve doesn't count for anything. Offering him the house at a price before listing on MLS is fine. thinking he has any "right" to pay your highest offer plus $1 I wouldn't do. It just doesn't seem fair to anyone involved including yourself. I would certianly disclose the real siutation to your RE agent prior to signing as I doubt they'd like the highest plus $1 if they are getting no commission out of it.

Are you sure James is a college professor? Because 'right of last refusal' is not how the terms work! ;-) But anyway...

It sounds like what James wants is the right to swoop in and top a competing offer -- or in other words, an auction that's fully transparent on his end. This seems like a great opportunity for YOU, the sellers, to get the best possible price, since what you'll have is a multiple contract situation where you could play both bidders off against each other. (Or piss them both off, if played poorly.)

If you were to offer it to James first for a price determined by one or more appraisers less 3% RE commissions, he can be assured of getting a relative bargain -- as can you (also saving 3%), plus you save the hassle of staging and showing.

But if you list with a Realtor, then you're pretty much on the hook for that 6%, assuming he/she brings you a qualified buyer. (That 6% comes from your side as a seller, which is why I'd suggest giving James the 3% discount up front -- or even the full 6% if the staging and showing hassles are big to you.) You should be able to negotiate a reduced commission if James topples the sale, but really, the Realtor should be compensated fairly since the work will be the same, regardless of which party buys.

Giving James any right to meet or top an offer puts you in a difficult negotiating position in that you really couldn't counter any offers from other buyers. What if the other buyer accepts your counter? Then you'd have to say "Oops - have to let someone else have a crack at it first..." -- Not good faith. You could make your counter-offers to James first, but he'd need to be prepared to move! so as not to screw up your contract process with the other party.

I don't get it. I know what first refusal is, but last? Does that mean "James" expects you (and your realtor) to go through the trouble and expense of finding a qualified buyer and then he swoops in and (presumably) tops that offer? Sort of like sniping on eBay?

While it is possible to exclude someone from the listing agreement's commission schedule, it doesn't seem fair to a potential agent to exclude a particular potential buyer who intends to top any other valid offer. Good for the sellers, perhaps, but a very bad deal for the agent - and a not so good deal for other potential buyers who are merely being used as stalking horses.
I agree with your assessment, sniping is a good analogy.
As a buyer I would not look at a house that had such a deal or if an agent would I list it. I think you are hurting your chances, I would never give that right to anyone. This agreement guarantees James can always buy it cheaper than market value. Now maybe James is broke and can't come up with the money that might be a good thing to hope for...
Is it possible for you to rescind that agreement, was this agreed in writing, I don't understand why you made this agreement on a house you were buying?
Help us, maybe we are misunderstanding the transaction.

No, the agreement was a verbal one.

I think we'll get the house appraised and let James know the price and go from there. If he wants it, he can pay that price or close to it. If not, we will get a REA and let him/her handle it.

Thanks for all your input. I will let you know what transpires.

How would you know what the LAST offer is, anyway, unless there were multiple offers at the same time? Would ANY offer be considered the LAST offer?

A couple of thoughts/questions.

First, do you think the house will sell easily at the price you want? What if you put it on the market and you get no offers? You might be in the awkward position of going to James and telling him you've been on the market for x months, and don't have any offers. Would he like to buy it for $x. He might be leery since there are no offers, and might lowball you.

If you don't think it will sell easily, skip the realtors (who wants to pay 6% commission on top of a low price?), go to James, and tell him it is a hassle to market the home and keep it ready for showings. If he will buy it at $x, sell it to him. Have a lawyer do the paperwork, and you'll save a mint on commission.

However, if you think the house will fetch a lot of offers at an attractive price, then it's to your advantage to include James in the mix.

One last thought, there are some buyers who will be scared away if they know there are multiple offers or somebody like James in the wings. If it was me, I'd keep that to myself till he actually makes an offer.

blueheron, I think you're handling this situation well. Good luck and do come back to post the results, if you wish.