Editor’s note: This article was first published in November 2011, and describes the Spanish housing market of 2011, with sales collapsing, prices falling every year, and buying a home as an investment not advisable.
It’s no secret that home sales, at least in Spain, have fallen dramatically. In fact, buying a home as an investment is not advisable these days (unless the terms are exceptionally good). Some homeowners have spent years desperately trying to sell, only to find that every year their home’s value, instead of rising as we were used to, now goes down. That’s why, in this “finished” market, homes offered under a rent-to-own contract (in Spain, alquiler con opción a compra, a lease with an option to buy) tend to be in stronger demand. Let’s look at the advantages of this kind of contract for both tenant and owner.
Advantages of rent-to-own for the owner
The owner has a clear advantage with this kind of contract. Besides the possibility of selling the house, for as long as the “potential buyer” occupies it as a tenant, the owner receives an income that helps plug some holes and, in many cases, keep paying the mortgage, which is usually what puts so many families under financial strain.
As the name of the contract says, the sale of the home is an option, so it doesn’t mean the “tenant” will end up buying it. But at least during that time, our house becomes an asset (it generates income) rather than a liability.
Advantages for the tenant
This kind of contract often appeals to people who don’t want to feel they’re throwing their money away on rent, but who aren’t yet sure they can afford to buy a home. It gives them a few years to make up their minds or to wait for their financial situation to improve. If they do decide to buy, part of the money paid in rent will be deducted from the final price of the home.
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New couples who are “trying each other out” also often turn to this kind of contract. They start living together but don’t know how things will go, so they have a few years to see whether they’re compatible. When the time comes, they’ll keep the home to start a family, knowing that if things haven’t worked out between them, they can go their separate ways without a debt tying them together for many years.
How does a rent-to-own contract work?
There is no single standard contract, so it can be highly customised to reach an agreement between the owner and the potential future buyer (the tenant): amounts, options and percentages can all vary. Put briefly, a rent-to-own contract sets a price for the rent and also a price for the option to buy. It also sets how much of what has been paid in rent will be discounted from the sale price once the decision to sell or buy the home is made.
The percentages are usually set by time periods. For example, 60% of the rent paid could be deducted if we decide to buy the home during the first year, and 40% if we buy it in the second year. If the tenant doesn’t exercise the option to buy, they lose the money set as the price of the option.
As with any commercial transaction, the terms must be negotiated and made clear from the start, and everyone must be absolutely clear about the final sale price, the time periods and the discount percentage for each period. There’s nothing better than an adviser who knows the subject to guide both buyer and owner, so that nobody gets any surprises as time goes by.
It’s undoubtedly a good option for both tenant and owner, and this kind of arrangement is also becoming more common when renting out commercial premises for businesses.
Featured image: Flickr user grupofranciscohernando, CC BY-SA 2.0, via Wikimedia Commons.
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