The most common question when it comes to looking for a real estate property is: to buy or to rent? However, there is a halfway option with which you can enjoy the benefits of both choices.
Indeed, the housing “rent with option to buy” contract can be defined as a hybrid or mixed contract composed of two subcontracts, one for renting and the other for buying a real estate property. This type of contract allows the tenant to live in the dwelling for a certain period of time. At the end of the term, he/she will have the right to buy it for an agreed price, from which the rent paid up to that moment will be discounted, totally or partially.
According to the Spanish Supreme Court, “with this contract, one party grants the other party the exclusive power to decide whether or not to conclude the main contract of purchase, which should happen within an agreed period of time and under certain conditions” (ruling dated 02/12/2009).
It is, therefore, a type of contract that can be interesting for both contracting parties: for the tenant because he/she can live in rented accommodation while he/she invests in a possible purchase and doesn’t have the feeling of paying a monthly rent from which he/she gets no return from; for the landlord because, while the tenant does not buy, he/she has his/her property rented and therefore gets a regular income and also obtains financial liquidity by receiving an initial downpayment from the tenant in return for having the right of exercising the option to buy.
This type of contract is governed in the first place by its own provisions in application of the freedom of will of the contracting parties. On the other hand, the clauses referring to the rental contract have to comply with the Spanish “Law 29/1994, of 24 November, on Urban Leases” being of supplementary application and, in the absence of an express agreement or applicable rule, it will be governed by the provisions of the Spanish Civil Code. Finally, the latter normative body will also govern the content of the future purchase of the dwelling.
The most important aspects to consider before deciding whether this particular contract is or not a good option for you, are in the one hand to be aware that, in order to benefit from the right to exercise the purchase option, the tenant will usually have to do an initial downpayment of between 5% and 10% of the purchase price of the property, that will then be deducted if it becomes effective, but which the tenant would lose if he/she doesn’t exercise the purchase option in the agreed period of time. This means that, if this type of clause is included in the contract (as it happens in the majority of cases), one needs to have some savings to be able to enter into this kind of agreement. But the positive thing is that this deposit operates as a guarantee to the tenant that the landlord will be obliged to sell him/her the property if he/she decides to exercise the option to buy. In other words, it will be mandatory for the landlord to sell and he/she will not be able to back out.
In relation with the rental agreement, it will be necessary to specify how long the tenant can remain rented (according to the law in force indicated above, a rental agreement for residential use can last up to 5 years with subsequent annual extensions up to a maximum of three more years), how much time he/she has to buy the property, the amount of the monthly rent (which will normally be higher than the market price because it’s a contract that gives more rights to the tenant), who will pay the expenses derived from the rental (supplies, taxes, etc.) or who will undertake the reforms and repairs in case they are necessary.
With regards to the future purchase, it is necessary to indicate the final price of the transaction. It’s relevant to underline that the purchase price will be fixed at the time of the signature of the contract, which will be paid years after in some cases. This is one of the key points of the agreement, since it can have crucial consequences for the future, e.g. the tenant could save a lot of money if the agreed price is lower than the market price of the property at the time he/she exercises the option to buy. Besides, before signing the contract it’s relevant to know the “legal status” of the property, which includes e.g. that the property is free of charges and encumbrances and that there are no urban planning infringements.
But let us return to the fundamental aim of this type of agreement: the main reason for the tenant and future buyer to enter into this kind of contract is that he/she will be able to deduct the monthly rents paid to the landlord from the referred purchase price. Nevertheless, this possibility isn’t usually endless, meaning that the amount of the rental instalments to be deducted from the final purchase price may vary, i.e. they may be fully deductible during the first year of renting and only partially afterwards and the percentage may even decrease (60% during the second year, 50% during the third year, etc.). Therefore, most people decide to buy the property they are renting after the first two or three years.
Finally, it’s interesting to list some of the advantages that this kind of agreement offers for both the tenant and the landlord. Starting with the tenant, this contract is an option to consider for those people who do not have sufficient savings to afford to buy a property immediately. Indeed, if you want to apply for a mortgage loan at a bank in Spain, you need to have available at least 20% of the purchase price and also the necessary amount to cover the taxes and other expenses like Notary and Land Registry.
On the other hand, as already indicated above, some part or the whole amount of money you pay for rent is afterwards deducted from the purchase price of the property. This may be seen as an indirect way of financing the purchase without paying interest to a financial institution. It also gives you the option to reserve the property you are interested in while you save up to buy it. Also, if the tenant finally needs financing for the remaining purchase price, the amount needed from the bank is reduced by the monthly instalments that were paid to the landlord. Last but not least, this agreement offers the tenant the possibility of deciding whether the dwelling really meets his/her expectations and of checking if it has a good location, if there is too much noise, what the neighbours are like, etc.
The benefits for the owner are not less important: he/she gets greater security regarding the payment of the rent, as execution of the option to buy requires that the tenant has made the stipulated payments. Also, as the tenant makes a first downpayment of 5 to 10% of the purchase price, this amount operates as an insurance against non-payment, since the tenant won’t have the possibility of deducting it from the purchase price if he/she doesn’t execute the option to buy.
As a final consideration, although the described contract might appear very attractive, the fact is that there are very little number of properties on the market where the owners offer this type of contract. Usually, they are more conservative and decide whether to rent or to sale, but if you would like to explore this new kind of opportunity, indeed having a good lawyer at your side will give you the necessary confidence to make this step. Don’t hesitate to contact us to start making your property more profitable!
