Rental With an Option To Buy? No Thanks, Not Usually

When you are moving to Spain you have three options really for your accommodation (or four if you bring a tent);

1) Purchase a property 2) Rent a property 3) Rent a property with a purchase option

The first option is fine, the second suits a lot of people too but the third presents problems peculiar to this type of contract and make coming to an agreement that suits both parties rather difficult at times. Let's look at the issues that can come up: a) The Contract: The rent to buy contract is more complicated than a simple rental contract as it has more conditions and includes clauses that need to be adhered to by both parties in the transaction that penalise one party and benefit the other. Some of these clauses are the length of the option, the upfront payment to guarantee the option, the amount payable per month, fluctuations in the market, clauses about responsibility for damage and insurance and the amount set aside against eventual price. There also need to be clauses in case of non payment of any current mortgage, against debts incurred on the property during the rental period, clauses about utility bills and services and responsibility towards any community. As you can see there is a lot to consider. Within these potential issues let's take a look at some of the major problems:

The Length of the Option - There are various reasons to have a rental with an option to buy contract, One of them involves the current lack of funding in Spain for purchase through mortgages. It is unknown how long this lack of funding may take to resolve itself and for mortgages to become more freely available. Therefore setting a fixed time period for a client who wants to get a mortgage is fraught with danger for the buyer who may easily lose their deposit and part payments made if they are unable to secure funding further down the line. An open time period means there may well be no escape from an indefinite situation for the seller. Finding a mutually convenient time period to exercise the option can therefore be difficult.

The Upfront Payment - Both parties need to be tied into an option contract for it to have any effect. It used to be that an option contract would always have an upfront payment that offsets the eventual price of the property, i.e, if the cost of the property is 200,000 Euros then the upfront payment may be 20,000 Euros and then there are monthly payments of 1000 Euros. If the property is then bought after a year then the final payment is 200,000 - 20,000 - any agreed discount from the monthly payment (More on that later) If both parties are not tied in through an upfront payment, which is becoming more normal these days, then there is little likelihood of completing a successful sale through the rent to buy contract because of the reasons given below in the Experience section. As a buyer it is in your interest to have a contract that benefits you without having to shell out an upfront payment on an option contract.

The Amount Payable Per Month - Oftentimes the monthly payments are discounted in their entirety from the full cost. However there are cases of the monthly payments only partially offsetting the cost. This is typical where there is a mortgage for example and part of the payment goes to cover the mortgage repayments or interest during the life of the option contract to guarantee no actions are taken from any bank to repossess a property and the payments are thus used for the right reasons. The actual terms and conditions of this clause are subject to detailed negotiation between the buyer and seller and cause no end of friction and arguments normally.

Fluctuations in the Market - If a contract time period is a couple of years or even longer there is a good chance that there will be movements in the market meaning that the set price is either too high (In a falling market) or too low in a rising market. Obviously whichever way the market moves benefits one party and penalises the other. This may cause a lack of goodwill in one of the parties making the eventual purchase more difficult to bring to a successful and happy conclusion.

b) The Cost: Rental usually costs more on an option contract because the contract means you are partially buying into the property and also the tenant may want to offset the final amount  to a greater extent. A property that can be rented for 1000 Euros may well cost 1500 Euros per month on an option contract so that the final amount is reduced by offsetting. If you are happy to overpay for a rental then fine. However it cannot be recommended as a great way to spend your money. c) The Experience: One of the things that can be guaranteed when somebody is renting with an option to buy is that they will find out about any hidden problems that the house may have or that problems will come up during the life of the rental. This will almost always scupper the option contract and the tenant will buy another property rather than the one they are living in (They never get to find out about the issues that the other property has, it just looks perfect). It is therefore quite pointless having a rental with option contract for the tenant because they will then lose the upfront payment if they do not complete and any part of the money that has been used for the rental cost during the time they spent there. The tenant may also do work on the property during their occupation of the house and this work may be for the benefit of the property or not (It all depends on taste) A botched attempt to change the kitchen for example may knock thousands off the value of the property and this all becomes a problem if the option isn't taken up. There need to be clauses in the contract about the ability to perform modernisations or work on the property while at the same time making sure that basic essential maintenance is always done. d) The Relationship: A medium or long term rental will almost always cause friction between landlord and tenant. A rent to buy contract may increase those problems ten fold because both parties believe the house to be theirs, in the case of the landlord rightly as the final payment hasn't been made and in the case of the tenant (wrongly) because they do not hold the deeds through having signed at a notary. However you will always find that they have bought into the property both monetarily and emotionally. Relationship issues will cause disagreements at the contract and completion level even if the contract is watertight. e) What Happens if...?: There will come a point in the life of the rent with an option to buy contract that the tenant decides they do not want to go through with the purchase. At that point they may still be living in the property of course but be actively searching for another property to buy. Access for the landlord to show the property to other potential parties is essential at this stage and that may well interfere with the tenants' daily lifestyle. At this stage you will most certainly find that the relationship between the two parties is at its most stretched because the landlord will be disappointed that the contract and sale will not be completed and may well be desperate to get the property really back on the market. For all of these reasons and a whole host more I really cannot recommend a rental with an option to buy contract. As a buyer if you really think you want a place but cannot afford it at the moment for whatever reason then do everything you can to convince the owner to do you a rental or find a way to finance the purchase. It will probably save a lot of problems going forward. As a buyer if you have no other option than to do a rent to buy option then make sure the upfront payment is minimal and you have the right to purchase the property at the stipulated price at any time during the contract. Also make sure that there are no other penalties if you do not complete apart from the loss of monthly payments made or any upfront payment that you may have made. Make sure that the contract is equivalent to an "Arras" contract not a "Compraventa" contract where you can be obliged to purchase the property. And finally don't worry too much. If there is pressure to do a rental with an option to buy contract then just walk away. There are plenty of properties available both for rent and purchase which would present you with fewer complications. And life in Spain is meant to be a lot simpler not fraught with complications and problems. Tranquilo! Spanish Contracts
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