A rental contract with the option to buy is very attractive for those who want to buy a home and do not have the necessary financial capacity to do so. It is a way to ensure that what we pay for our rent is not “lost” and we can take advantage of it to purchase the property later.
How does rent with the option to buy work?
Renting a home with an option to buy works as follows: the tenant lives in the home and pays monthly payments as if it were a common rental, but once a period of time has passed that has previously been agreed with the owner, The tenant can decide to buy the home or not.
The concept seems simple, but when we think in detail, doubts arise: are the monthly payments higher than in the normal contract? What is the premium? How much does the tenant lose if he refuses to buy? We will resolve all these questions.
What type of contract is used in rent with an option to buy?
Rent with the option to buy has some peculiarities that make the process of writing the contract more complex.
To begin with, this type of lease is carried out through a double or mixed contract. This means that it includes a rental subcontract and another purchase and sale subcontract. In this way, the tenant can live in the property for a specific period of time and, upon completion, will have the right to buy it and deduct, totally or partially, the rental payments.
It is very important that all the conditions of both contracts are well specified to avoid any subsequent problems. These are:
- Rental contract: In the rental contract part, there is a series of essential data: duration of the lease, estimated period to exercise the right to purchase, the monthly rent or who bears the community or possible expenses reforms.
- Purchase and sale contract: In this part of the contract you will have to specify the owner’s willingness to sell the home to the tenant if the tenant shows interest in it. In addition, it must include the sale price of the property, the percentage (whether fixed or variable) of the rental payments that will be deducted from the sale price or the amount of the initial premium that the tenant must pay.
How is this contract regulated?
As these are two subcontracts, the rental contract is governed by the Urban Leases Law (LAU) for the duration of the rental. The regulation of the purchase and sale contract for a home is contained in the Civil Code.
Why would renters choose rent to own?
Renting with the option to buy has advantages and disadvantages for each of the parties, which we will see later.
- The first situation in which a tenant may prefer renting with an option to buy over common renting or purchasing a home would be in a somewhat precarious financial situation: if banking entities are reluctant to finance them, housing prices are high and don’t have enough capital to put down a down payment on a house yet, then rent-to-own is starting to sound a lot better. Renting with the option to own is a common option for young people who lack savings.
- The second situation is that, due to the uncertainty caused by the general rise in prices, the growing legal training of individuals and the ease of having a legal advisor, many people are opting for this type of contract. This is because they do not have 20% of the amount necessary to undertake an operation of this type. In fact, in Spain it takes between 5 and 10 years to save for a down payment on a house.
Another additional advantage that this modality offers is that it allows future owners to get to know the home and the area in depth, and to know if it fully adapts to their needs before formalizing the purchase.
Advantages and disadvantages of rent with option to buy for the tenant
The advantages of this type of contract for the tenant or buyer are the following:
- Savings thanks to renting with the right to purchase. For the lessee, the main advantage of renting with an option to buy is that means saving time and saving for the purchase of the home, since the rent of the rent is discounted if, finally, the property is acquired.
- Ease of granting a mortgage. This savings makes it easier to grant a mortgage, since, generally, the entity’s banks value positively that the applicant has already paid for part of the home.
On the other hand, this modality also has disadvantages:
- Purchase option premium. This must be agreed in the purchase and sale contract, although it is not mandatory, but it is very frequent and recommended. It is usually set as a percentage of the agreed sale price and is similar to a deposit, as it serves to guarantee the owner that the purchase intention is serious. If the purchase option is not exercised, the premium amount will be lost.
- The tenant cannot enjoy the housing price reductions. The sale price of the home is agreed in the purchase and sale contract from the beginning, so it will not vary. This will be a relief if market prices skyrocket, but it is reversed for the opposite case: if the price of housing falls, the tenant will not be able to take advantage of this fact. However, the rental price may vary depending on the CPI.
Advantages and disadvantages of rent to own for the owner
The advantages of this type of contract for the owner or landlord are the following:
- Give a quick exit to the property.
- Numerous tax advantages: In addition, in the same way that tenants can qualify for certain rental aid, the owners of a rented home with the option to purchase can benefit from tax advantages for lessors. Besides, sales taxes are not paid until the deed is executed.
- Quick liquidity to the owner: The main advantage is usually receiving money in advance, in addition to the possibility of charging higher monthly payments. In other words, liquidity.On the other hand, this modality also has disadvantages:
- The money is received gradually and not in one payment. The least positive part for the owners is that, at first, the amount received for a buy. The money is received gradually, which is a liquidity advantage, but it is also an inconvenience of not having the amount at the moment.
- Uncertainty regarding the sale and the market situation. Furthermore, when defining the price of the property at the time of signing, it must be adapted to the market situation. This means that, even if prices rise, the cost of the property will have to remain the same at the time of purchase. But the worst thing for the owner is the uncertainty, since you can be sure that the sale goes through. Although he would stay with the quantities paid so far in that case, it would lose its buyer.
- Taxation problems in rent with the option to buy. The dilemma is posed by the premium of the purchase option, since it becomes part of the personal income tax base and therefore may increase the average tax rate. This increase in taxes hurts the landlord, since he would only “get rid” of this if the tenant executed the purchase option in the same year, but it is normal that this is not the case.
What considerations must be taken into account when renting with the option to buy as a tenant?
In addition to what has been seen above, there are a series of considerations that both parties must take into account when drawing up this contract. Therefore, the tenant must be aware of:
- You have the right to stay in the home for the duration of the rental contract. Even if it is decided not to exercise the right to purchase, the tenant can remain rented while the contract is valid.
- You can extend the rental contract. For this it is essential that the owner agrees. If this action is carried out, the purchase option must also be specified in the extension because otherwise it would be invalidated.
- The tenant has exclusivity to purchase the home, as long as the term established in the contract is respected.
- It is not necessary to wait until the end of the contract to exercise the right to purchase. It can be done sooner and, in fact, is beneficial for both parties: the tenant does not suffer from price fluctuations in the rental income and the owner manages to complete the sale ahead of schedule.
- If there are two delays in the payment of the rent, the purchase option is lost. Furthermore, if this happens, the premium contributed is also lost.
- Comply with tax obligations. As long as only the price of the home and the period to exercise the right to purchase are indicated, the tenant may deduct the cost of the rental.
What considerations must be taken into account in a rent with option to buy as an owner?
The owner, before signing a rental contract with the option to purchase, must take into account the following aspects:
- It is advisable to set an initial premium. Although it is not mandatory, establishing this payment ensures that the tenant is interested in purchasing the home.
- The obligation to maintain the contract. This means that you cannot assign, rent or sell the property to third parties while the tenant’s right to purchase is in force.
- The purchase price cannot be modified, but the rental price can be modified. Although none of the parties can change the price of the property that is set in the contract, the rent may vary depending on the CPI if required by the owner.
- The contract can be registered in the Property Registry. For this it is necessary that both parties agree and that the basic requirements are met. That is the purchase price, the premium and the period to exercise this right appear.
- Comply with tax obligations. If only the term and price of the housing, while the rental lasts, the owner will have to declare it. Furthermore, if you perceive a premium for the purchase option, you must also declare it.
