Renting with an option to buy is a rental modality that has seen a significant increase in recent years due to movements in the real estate sector and mortgage concessions.
At Gumper, we want to explain how this rental system operates and the advantages and disadvantages that renting with an option to buy can provide.
What does renting with an option to buy mean? It means that a person rents a property for a specified period and, at the end (or within the established timeframe), can buy it for a price set from the beginning, normally discounting part of the rent paid. It is an intermediate formula between renting and buying.
What is renting with an option to buy?
Although many people use both concepts as synonyms, they are not always exactly the same. In practice, it is more common to speak of renting with an option to buy, because the tenant has the right to buy, but not the obligation. That is, the owner commits to sell if the tenant decides to buy, but the tenant can ultimately decide not to execute the purchase.
Renting with an option to buy refers to the rental option by which, according to the contract, the tenant of a property holds the right to acquire the home after a specified period of time.
When we are looking for a property to rent, one of the major drawbacks that usually arises is allocating a certain monthly amount of income to a rental that will not yield benefits. When we rent a property with an option to buy, this monthly amount can act as a down payment for the purchase of the property and result in a very advantageous operation for both the tenant and the landlord.
Practical example: imagine an apartment for rent with an option to buy whose agreed price is €220,000. The monthly rent is €900 and it is agreed that 70% of each monthly payment will be deducted from the final price if the purchase is executed. If the tenant lives there for 3 years, they will have paid €32,400, and €22,680 would be deducted from the price. In that case, the final price to be paid would be €197,320 (plus taxes and transaction costs).
When entering into this type of rental, we must consider that it is a mixed contract, in which we will find two contractual actions. The conditions and clauses that will regulate the rental of the property and another in which we will regulate all aspects of the property purchase operation.
The tenants will inhabit the property for the time stipulated in the contract. It is normal for periods to be established according to the rental law as if it were a regular lease. Once that period of time has elapsed, the tenant has the right to acquire the property. It is important to emphasize that the price of the property is established at the time of negotiating the lease, so it must be acquired at the agreed price. Once that moment arrives, the rent payments made by the tenant up to the time of executing the purchase contract for the property will be partially or fully deducted.
Requirements for a lease with an option to buy
Contracts with an option to buy a property are not covered by any framework regulation, so they do not present specific conditions, and the will of the signing parties prevails.
Similarly, certain minimum requirements must be met for its formalization:
Regarding the option premium, it is usual for it to represent a percentage of the property’s value (for example, between 3% and 10%), although it will depend on the market, the owner’s interest, and the negotiation. In many cases, this premium is deducted from the final price if purchased, but if the option is not executed, the owner usually keeps it as compensation.
- Rental period: It will reflect the period of time that the property must be listed as rented before the execution of its purchase.
- Purchase price: It will state the amount for the future purchase of the property.
- Premium: In many contracts, we see a premium referred to, for which the landlord is paid an amount for granting the option to buy. As we will see later, there is a possibility that the tenant does not execute the purchase, in which case this premium would be lost by the tenant if this situation occurs.
- Purchase decision: It is common to find the freedom for the tenant to execute their option to buy and the time frame to do so, as it may occur that they wish to execute it before the lease contract ends.
Before signing a contract of this type, it is important that the document clearly reflects the key points, as poor drafting can lead to conflicts:
- Final purchase price agreed from the beginning.
- Duration of the lease and maximum period to execute the purchase.
- Percentage of rent that is deducted from the final price (if applicable).
- Amount of the premium and whether it is refunded or deducted in case of purchase.
- Distribution of expenses (IBI, community, repairs, insurance).
- Withdrawal conditions if the tenant decides not to buy.
How is the purchase of the property carried out?
We can imagine a situation where we want to acquire the property. For this, as tenants, we must express our intention to the owner within the established timeframe. The most common way to carry out this action is through a notarial act, as the intention to purchase must be absolutely clear, and it is not sufficient for the tenant to designate a notary for such purposes.
Additionally, for greater legal security, in some cases it is advisable to register the purchase option in the Property Registry. This protects the tenant against a possible sale of the property to a third party or against future encumbrances, as it would be officially recorded that there is a rental contract with a purchase option in force.
The purchase option has particularities for tax purposes, as this action is subject to ITPAJD (Tax on Onerous Property Transfers and Documented Legal Acts), as long as we are in a situation of agreement between two individuals.
Later in our article, we will analyze the advantages and disadvantages for both buyer and seller, delving into the tax implications of the same.
Once we have initiated the process of purchasing the property, the procedures will be carried out in the same way as a usual sale, taking into account only the particularity of regulating the sale price by deducting the monthly payments made by the tenant.
Advantages of renting with a purchase option
I am the owner of a property
- Benefit from rental income from the start of the rental contract.
- A short-term gain is obtained without giving up a future sale of the property.
- Tax benefits from renting housing.
- If the sale of the property does not occur, the property owner keeps the contract premium.
I am the tenant of a property
- The monthly rent paid to the owner partially goes towards being deducted from the price of the property.
- The purchase of the property can be executed at any time during the rental, which provides significant freedom when deciding and processing mortgage concessions with the bank at the most opportune moment.
- If the purchase of the property is not executed, the transaction can be recorded as a capital loss in the IRPF by losing the purchase right.
- The purchase of the property is always secured, which guarantees peace of mind during market fluctuations.
Disadvantages of rent-to-own
I am the owner of a property
- Inability to sell during the contract. If you wish to sell the property during the contract, even if a better offer is made than the one already agreed upon, the operation cannot be executed as it is blocked by the rent-to-own contract.
- In a growing market, this can be a disadvantage as, if the property increases in price, its value cannot be increased.
I am a tenant of a property
- If the purchase of the property is not made, the rent-to-own premium is lost.
- The tax burden is significant. The contract is subject to double taxation. Both for the lease, which must be settled in the ITP tax, and for the subsequent purchase option that will be subject to the Property Transfer Tax (ITP), with the taxable base being the price paid for the rent-to-own option.
Both for selling a property and for renting it. Rent-to-own is a great alternative. This year 2020, market movements leave us perhaps in a situation of uncertainty, despite the fact that real estate transactions continue normally and there has been stabilization in the market. But it can be a great way, as an owner, to monetize a property and facilitate its future purchase.
As a tenant, it can be a great opportunity if what we want is to reduce the final amount in the future purchase. It should not be overlooked that having the purchase of the home guaranteed is an advantage when negotiating at the right time with financial institutions, as well as avoiding the changing fluctuations of the markets.
In general, a house or apartment for rent-to-own is usually ideal for people who want to buy but do not yet have enough savings for the down payment or need time to stabilize their financial situation. It is also an interesting alternative for owners who wish to sell but prefer to obtain immediate profitability while waiting for a future sale.
At Gumper, we will be happy to help you, whether you are looking for a property with these characteristics or if you wish to rent with an option to buy your property.
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