How does rent-to-own work? Everything you need to know

Rent-to-own contracts come with a number of requirements, what are they and how does it work?
Rent-to-own is a type of real estate transaction that gives tenants the opportunity to lease a property with the possibility of buying it in the future.

This option combines elements of traditional renting with the opportunity to acquire the property on a long-term basis, offering flexibility and security for both the tenant and the owner. Explore in detail how this system works and its key considerations for both those looking to rent, and for those owners who are considering offering this alternative.

How does a rent-to-own contract work?
Rent-to-own involves a double contract: one for rent and one for sale. In this way, a normal lease contract is signed and a period is set in which the option to buy can be made effective.

Once the stipulated rental period has ended, the tenant has the right to buy the property for the price that has been agreed with the owner when signing the contract. The rent payments paid up to that point are partially or totally deducted from this price.

Lease-to-buy is an option to consider for those people who do not have enough savings to afford the purchase of a home, but who do not want to miss the opportunity to buy that house, or are unsure whether to do so or not.

Model of a rental contract with the right to buy
Download these models of a rental contract with the option to buy for free, ready to fill out and updated to the latest law:

Rental contract with the option to buy in PDF
Rental contract with the option to buy in Word
What to keep in mind about renting with the option to buy?
Before signing any rental contract, regulated by the Urban Leasing Law (LAU), it is important to specify the time in which the tenant can remain rented, how long he has to buy the house, the amount of the monthly rent, who will pay the expenses derived from the lease (utilities, taxes, etc.) or who will undertake the reforms and repairs if they are necessary.

Regarding the future sale, under the legislation of the Civil Code, it is necessary to indicate the final price of the operation, the percentage to be deducted from the rental installments of the final price (total or partial) and the amount or initial deposit that must be paid to formalize the contract (between 5 and 10% of the sale price that will later be deducted from the sale if it is made effective and that the tenant will not recover if he does not finally buy it).

On the other hand, it should be noted that, in a rental contract with an option to buy, the tenant may acquire the house before the deadline if he has the money to do so and, in addition, he has preference over other buyers. As this is a complex contract, it is best to seek the advice of a lawyer.

The costs of renting with an option to buy
In this type of contract, you will have to assume the costs corresponding to the rent and the purchase. Regarding the rental costs:

Reservation: Initial payment to ensure that the property is not rented or sold to another person while the conditions are being negotiated (not obligatory)
Deposit: Equivalent to one month's rent and, if damage is caused to the property, it will be used for repairs; if not, it is returned at the end of the rental or when buying the house
Monthly rent: Monthly payment agreed with the owner during the rental period
Rental formalization costs: By law, these costs (real estate fees, drafting of the contract, etc.) must be paid by the owner
On the other hand, the costs associated with the purchase option are:

Premium: Advance payment of, usually, 10% of the price of the house when signing the contract, which is lost if the tenant does not exercise the purchase option
Price of the house: When exercising the purchase option, the price previously agreed with the owner must be paid, deducting the premium and the rental fees already paid
Purchase and sale formalization costs: These include taxes derived from the sale, notary, manager and registrar fees; Normally this amounts to 10-12% of the house priceLength of a rent-to-own contract
Regarding the question of how many years a rent-to-own contract can be made, it is a crucial aspect that varies depending on the agreements established between the tenant and the landlord.

Although the Urban Leasing Law (LAU) establishes a five-year period for leases, this duration can be extended if both parties agree. In the event of an extension, it is essential to carefully reflect the new conditions agreed upon, which may include adjustments to the purchase price, payment conditions, additional terms, among other relevant aspects.

This allows the agreement to be tailored to the specific needs of both parties and facilitates long-term planning for both the tenant and the landlord. However, it is essential that any modifications are made in a clear and documented manner.

How much do you save with rent-to-own?
There are several advantages to considering rent-to-own. The first is the ability to postpone a significant part of the outlay, which offers short-term financial flexibility. However, the real savings come when you consider the amount of the mortgage loan you might need. To understand this better, let's look at a practical example with a 120,000 euro home:

Price of the home: 120,000 euros
By opting for a rent-to-own contract, the tenant agrees to a five-year lease
The agreed monthly rent is 1,000 euros
At the end of the 5 years, the tenant has paid a total of 60,000 euros
This means that he only needs to pay the remaining 60,000 euros. If he decides to take out a mortgage for this amount, he could opt for a shorter term, benefiting from lower interest rates compared to a larger loan.

However, if the tenant decides to buy the property from the start without opting for rent-to-own, he or she will probably need a mortgage for a higher amount, say 100,000 euros, taking into account that most financial institutions offer up to 80% of the total value of the property. Therefore, the interest and the amortization period will be longer, meaning that he or she will have to pay more in the long term.

In addition, another saving could occur: the property may increase in price during the period in which the tenant lives there. This is because the owner would be obliged to sell at the price agreed in the original contract. However, this is a double-edged sword. Just as the price of the house increases, it can also decrease due to the market.

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