Rent to own: How does it work and what are its advantages?

During the property bubble season, buying a flat in Barcelona was a very complicated and extremely expensive feat, especially for younger people. This is why the topic of renting with the option of buying came up as an alternative designed especially for this sector.

As its name suggests, this type of contract is a possibility of renting a home with an option to buy the property included in the clauses, and which is still an option of interest to many tenants and owners today.

At Withfor, we always want to keep you informed about what is happening in the world of real estate and offer you the resources and tools to know how to act in each case. Therefore, we dedicate this article to explain how renting with the option to buy works and thus, clear up all your doubts.

On this occasion, we have talked with Julie Plottier, Manager and Co-founder of Withfor, who will give us the keys to understand everything about this type of contract.

As Julie comments: “Until a few years ago the concept of renting in Spain was rare. Now, with social changes and increased professional mobility, that has changed.

Today, the rent-to-own contract is an alternative for people who want to buy a home but do not have the liquidity, guarantors, or mortgage option, and yet are interested and waiting for a good moment to buy a flat.

“Depending on the tax conditions of each person, they may be interested in or find a deferred purchase more attractive, whether for tax, liquidity or loan reasons”, comments Julie Plottier on this type of lease.

This is why this type of contract has gained momentum in recent years, as it has more advantages than disadvantages.

Indeed, the way a rent-to-own arrangement works represents multiple benefits for both tenants and landlords.

As Julie Plottier says, “leasing allows for something very important: time. During this period, there is room for reflection before making a final decision on whether to move in and invest in a new home. In other words, not only do you consider the opportunity of a rental-purchase house itself, but you also have the neighbourhood and sometimes even the city in mind”.

“Until a few years ago the concept of renting in Spain was rare. Now, with social changes and increased professional mobility, this has changed. Julie Plottier comments. So, in general terms, renting with an option to buy works like any other rental contract, with the difference that a purchase option is established for the tenant within the clauses of the document.

From the beginning, everything is stipulated within a lease with option to purchase before a notary, where all aspects are defined such as

• Initial bonus.
• Amount of the rental payment
• Price of the house.
• Deadlines for payment.

Julie Plottier clearly explains that a leasing contract should set out the following points:

• Agreed sales price of the home, including taxes when selling a home.
• Payment conditions agreed between the two parties. This includes how much is paid up front (which can vary from 10% to 30% of the value).
• Maximum time agreed for the purchase. If the sale does not take place after this date, the option to buy will be lost.

It is always advisable to study the agreed conditions correctly to ensure that both parties are well protected. Both parties should talk to their lawyers or managers to analyse the proposal properly.

At Withfor, we work directly with expert lawyers who study each case. The reality is that we do not make just one type of model rental contract with the option to buy, which is why we discard standard contracts, as we know that each owner or tenant will have a different context and will need a proposal that adapts to their needs.

Advantages of this type of contract

For Tenants

• For many people it means a form of saving.
• You can have a home by paying a fixed amount for a time, without interest.
• From one point with the monthly rent payment, you are paying part of the capital of what will be your property.
• If the price of the property increases over time, it does not harm the tenant-buyer because the price is frozen.
• It ensures that the property cannot be sold to third parties.

For owners

• They can obtain a faster financial return, and not wait for the time periods common in a purchase (which would be from 6 months to 1 year).
• You get tax benefits for renting.
• If the purchase of the property does not take place, the premium previously paid by the tenant does not have to be returned.

Disadvantages of this type of contract

For tenants

• If you finally do not want to buy the property, you will lose the initial bonus.
• You may be paying a higher rent for private rental flats.

For owners

• This option does not guarantee 100% sale of your property. Rather, if it does not materialize, it will delay it.
• A possible sale to a third party is also not possible if we are talking aboutrental homes with the option to buy.
• If the price of the property rises, it cannot be renegotiated.
• You do not receive the entire amount for the sale in one go, but rather in parts.

So, what should you bear in mind with this type of contract?