During visits to our homes, many customers ask us about the possibility of rent with option to buy. A priori may seem like a good choice, but do you really know what it's all about? How does it work? What obligations does it entail? Here's how to explain everything.
What is a rental with option to purchase?
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The rent with option to buy is a contract by means of which a person, the lessee, you have the right to acquire a property after you have been renting it for a certain period of time. The rent-to-own contract is a good option for those who do not have the necessary funds to purchase a property at that time., but what do you plan to do in the future?.
This contract has a set duration, which can be from one to three years, in which the tenant pays an amount of money established by the landlord for rent and, además, an additional amount that is reserved as a purchase option. I mean, the lessee pays a premium for the right to acquire the property in the future, but you are not required to do so.
It is important to mention that the rental contract with the option to buy is different from a traditional purchase-sale contract, since in the latter case, the buyer acquires the property from the first moment. In the case of rent with option to buy, the lessee does not acquire the property until he exercises his right to purchase.
Some examples could be:
Imagine that you are interested in buying a house, but you do not have the necessary funds to do so. So you decide to sign a rent-to-own agreement with the landlord. This contract establishes that during the next two years, you will pay a monthly rent of 1000 euros, of which 300 euros are reserved as a purchase option. At the end of the two years, you will have the option to buy the house for 150 000 euros, using the 7200 euros that you have paid as a purchase option as part of the payment.
It could also be the case that a person has been renting a property for several years and decides to buy it.. If the owner is willing to sell, could sign a lease with option to buy, so that the tenant can exercise his right to purchase within a certain period.
In summary, The rent with option to buy is a contract that allows the tenant to rent a property with the possibility of acquiring it in the future. The lessee pays a premium for the right of option, that can be used as part of the payment in case you decide to buy the property. It is important to note that this contract is different from a traditional purchase-sale contract and that both parties must comply with the clauses agreed in the contract..
How do you manage a Rental with option to purchase?
The usual contract is usually 2 a 5 years of rent, prior to the purchase of the home, where for the first two years, the quota is estimated at a 100% to be deducted from the total purchase price, and from the third year, only one 80%. This urges the tenant to buy as soon as possible as it will be unprofitable to delay.
The premium, or amount of entry, must be from among a 5% and a 10% the value of housing, because this ensures seriousness and a firm intention to buy the home. Many landlords who have not exercised this right have later been affected as tenants have left and the transaction has not been made, having wasted precious time and other potential buyers.
In case the tenant gives up buying the home, you will lose the investment you have made in those years, as well as the entry premium. That is why it is recommended to study each proposal very well before signing these types of contract.
Once the sale price is agreed, It's important to put attention on, during the rental time, the lessee may have the opportunity to accumulate a down payment. This initial payment can be used as a credit towards the purchase of the property..
It's important to put attention on, in some cases, the down payment is non-refundable if the renter decides not to purchase the property at the end of the rental period. Therefore, it is essential that the lessee is sure that they want to buy the property before making any down payment.
Another advantage of rent-to-own is that it often allows tenants to live in a house or apartment that they might not be able to buy right away due to financial constraints.. Throughout the rental period, renters can save for a down payment and improve their credit score to apply for a mortgage, which will allow them to purchase the property in the future.
It's important to put attention on, although rent-to-own can be a great way for renters to purchase property, There are also some risks. If the value of the property decreases during the rental period, the tenant could end up paying more for the property than it is worth.
Además, if the lessee is unable to purchase the property at the end of the lease term, you could lose the money you paid as a down payment. Therefore, it is important for renters to read the contract carefully and have a clear understanding of the terms and conditions before signing any documents.
What are the option-to-purchase rental contracts like?
In fact, these types of contracts are not without any legal regulation, and their position is not clear within the Civil Code. While there is a regulation in art 14 Mortgage Regulations and is also mentioned in the Urban Leasing Act. Thus, it is governed in principle by the two parties agreed to, owner and tenant and since there are two pacts to comply, two contracts should be reflected, one for the rental and one for the buying and selling.
A right-to-check clause must be reflected in the lease, whereby the tenant is given the exclusive priority to purchase the leased property within the contractually prescribed period.
Requirements for rental contracts with option-to-buy
- Lease term
- Option-to-purchase term
- House price
- Rental fee price
- Percentage of the premium on house prices
- Supply and community expenses division
Landlord's obligations
The landlord (Owner) is obliged to maintain the agreed price of the house and not to dispose of the property, during the agreed deadline. The price of the sale cannot be varied, However, the monthly rental fee may vary depending on the CPI. Just like that, must respect the tenant's option-to-purchase exclusive for the duration of the contract without the possibility of selling the home to third parties.
Tenant's obligations
The tenant (Tenant) you are obliged to pay the dues without delay and to pay the rest of the price agreed at the time of the signing of sale. If the tenant is delayed by more than 2 monthly payments, you will lose the right to the option to purchase and the initial premium delivered.
In case the tenant wants to settle the payment with a date prior to the agreed, you may do so upon written communication to the landlord, not so with later date, unless both parties agree and the initial contract must therefore be cancelled resulting in a new contract. It will never be accepted that the term of the option to purchase is longer than the lease term for obvious reasons.
In the event that the landlord refuses to receive that communication, the contract shall also be terminated, passing the home at the hands of the tenant.
How to declare a rent with option to purchase
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As to how to declare this income from both the rental and the sale, the following situations need to be taken into account, because they are subject to the PCR.
- The tenant may deduct the rent and the landlord must declare what is received when the term and price of the home are specified, during the lease.
- The owner must declare the increase in assets at the time of sale.
- The buyer, in this case, you can deduct the sale, IN the IRPF as a regular purchase purchase. However, the initial premium cannot be deducted by the right of the option to purchase.
Advantages and disadvantages of renting with the option to buy
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Advantages:
✅ Flexibility: Rent-to-own gives tenants the option to decide whether they want to buy the property at the end of the lease or just keep renting. This can be beneficial for those who are unsure if they want to commit to the property for the long term., since it gives them the opportunity to “try before you buy”.
✅ Money saving: A rent-to-own agreement allows tenants to save money for a down payment, which is often one of the biggest barriers to buying a property. During the term of the contract, tenants can use the money saved to improve their credit history and save more money for the purchase of the property.
✅ Fixed price: The price of the property is agreed at the beginning of the contract and remains fixed during the term of the contract.. This can be a huge advantage in an ever-changing real estate market., since tenants can ensure that the price of the property will not increase during the term of the contract.
Disadvantages:
❌ Additional payment: Often, rent-to-own contracts require a down payment and an additional fee paid at each monthly rental. Sometimes, this additional payment is applied to the final purchase price, but in other cases it is lost if the tenants decide not to buy the property. This can be an additional financial burden for tenants who are already dealing with the cost of rent..
❌ Lack of ownership: During the term of the contract, tenants do not yet own the property, which means they can't make major changes to the property without the owner's permission. Además, if the tenants do not comply with the terms of the contract, they may lose the option to buy the property, as well as any additional payment made.
❌ Financial risks: If the tenants decide not to buy the property at the end of the lease, they may lose any additional payments they have made. Además, if the price of the property decreases during the term of the contract, tenants may end up paying more for the property than it is actually worth.
Frequently asked questions about renting with the option to buy:
Can I modify the property during the rental?
Yes and no. During the rental period, the tenant is expected to take care of the property and keep it in good repair. However, major modifications, like removing a wall, usually require owner approval. Although small improvements can be made, how to paint or install shelves, it is important to note that the tenant is not the owner of the property during the rental period.
What if I can't buy the property at the end of the contract??
If you cannot or do not want to buy the property at the end of the contract, the option to purchase will generally be forfeited and the amount of the option deposit paid at lease inception will be returned to the tenant. The rent-to-own agreement will set out the specific terms and conditions of what happens if the tenant is unable to complete the purchase by the end of the agreed term..
What if the owner cannot sell the property at the end of the contract??
If the owner is unable or unwilling to sell the property at the end of the contract, the purchase option will expire and the tenant will have to decide whether to renew the lease or find another property to buy. In some cases, the rent-to-own contract may include a clause that states what happens if the owner is unable to sell the property at the end of the contract.
Who is responsible for the maintenance and repairs of the property during the rental period?
The tenant is generally responsible for maintenance and minor repairs during the rental period. However, the owner is still responsible for major repairs, such as repairing a roof or replacing a central heating system. The rent-to-own agreement will set out the specific terms and conditions of who is responsible for what.
Can I negotiate the purchase price of the property at the end of the contract?
In some cases, the purchase price of the property may have been established in the rent-to-own agreement from the beginning. However, in other cases, the purchase price can be negotiated at the end of the contract. This will depend on the specific terms and conditions of the contract. In general, if the real estate market has changed significantly since the contract was signed, lower price may be negotiated.
Do you have more questions about how to manage a rental with option to purchase? Consults. Head to our network of offices and we advise you without obligation.