The wise formula: Rent with an option to buy

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12 Jun 2008 00:00 by mariadecastro Star rating in Algeciras (Cadiz). 8578 posts Send private message

mariadecastro´s avatar

In times of recession - imagination      (and the National Government back this now!)

For those wanting to sell: One of the most interesting commercial strategies to sell properties during those periods, when the demand for real estates decreases, is that one of the renting with an option to buy or the so called “rent-to-own” Real estate agents and developers use to resort to such kind of lease contract instead of keeping the property inactive. Private owners who bought to sell can benefit their possibilities this way too.

Real Estate Agents and developers that decide to launch this formula let their clients rent the dwelling for a reasonably moderate price, and after a certain period from 2 to 5 years the client is entitled to purchase it. The main advantage is that the sale price is reduced by the amount that the tenant has paid throughout the rental period.  The period must be clearly expressed in the contract; as otherwise, a presumption of an option period of 15 years will work.

This solution can be also found attractive by individual landlords or real estate investors who want to sell their properties. They can save money on the mortgage during the rent period and increase their future chances of selling the property. It is easier to find tenants if you give to them an option to buy than to find simple tenants. There is always a possibility to renew the lease contract with or without the option to buy.

The option to buy can (and it is much advisable) be registered in the Land Registry when the period to opt- to -buy is shorter than four years.

For those wanting to buy: This mix-financed  option  is suitable for people who can not afford buying a property due to its high price, since they do not have enough money to pay a deposit or can not obtain a mortgage loan from the bank.

And this is especially interesting during the periods of insecurity in the real estate market or financial uncertainty, when the interest rate increase is unpredictable, and it is unknown weather the consumers can assume this increase. Such a situation can be a good chance for those ones who are interested in a lease with option to buy.

The National  Ministry of Housing is including this type of contract among those which will receive Official subsidies within the Housing Plan 2005-2008.   

If you want to include the option to buy in the lease contract you can use the clause below as a model:

Eighteenth. – The Purchase Option.

(Yes, I am “generously” giving to you a clause as a model!)

“The parties agree that before the term of the present contract, FIVE YEARS, comes to an end, the tenant should be able to acquire the property of the real estate – object of this lease. To purchase the property, the tenant must formally inform the landlord about it within the last month before the date of expiration.

In case of possible purchase the sale price of the dwelling would be of ONE HUNDRED AND TWENTY THOUSAND (120.000) EUROS. Rental payments are not included in this price.

The sale of the real estate would be formalized by a public deed, free of charges. And the payment of the whole agreed price must be done in the moment of the contract signature. Expenses and taxes originated by the sale would meet the requirements of the Civil Code.

Any of the parties shall be able to register this lease purchase contract in the Property Book Office. The cost of the registration would be paid by the party who promotes I”t.

Of course, we always advise you for  a good lawyer to  take charge of the drafting of this kind of  contracts.

 



_______________________

Maria L. de Castro, JD, MA

Lawyer

Director www.costaluzlawyers.es

El blog de Maria



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28 Jun 2009 13:00 by Emerald Property Management Star rating in Estepona,Malaga. 180 posts Send private message

Thanks for this Maria.

If anyone has a 3 bed property in the Estepona Port area and would be willing to do a rent to buy please PM me or reply here. We could possibly go for a 2 bed if there is space for us to add a 3rd bedroom at a later date. Would need outside space for my children to play but it doesn't have to be a garden,a good sized teaace would be fine.

Please let me know if anyone has anything available

thank you



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Vicci Healy  Emerald Property Management and Building Specialists ...



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30 Dec 2011 12:52 by Susanspain Star rating in Mijas, Malaga. 138 posts Send private message

Susanspain´s avatar

Hi, We are looking for a rent to buy...

Just putting it out there… as although I keep getting told Rent to Buy is an alien concept to most Spanish, I know it is possible!
We only have a very modest budget of Eu35,000 as final price on a property (we have seen them at this, rare I know, but please no silly comments)....

We have 20% to put down now, have a regular contract job and can pay xxx Eu pcm and complete in 12 months time.

Our job is on the coast (Elviria/area), so must be commutable. We have been looking at Alhaurin el Grande. Would be happy to be based there, or if anything at all possible nearer the coast, even better.

The property must be ready to move into/i.e habitable (plus elec/water). We do not want a reform project. We are happy to do new bathroom/kitchen in time, but we need to live in property now.

Please let us know here or by PM if you have any info on such a property.

(NB We do not have the full amount to buy now, so need a rent to buy. Not feasible to stay in current rented property as it is eating up our income and we know rent to buy is the way to go.)

We have a lawyer in place and would like to move as soon as possible.

Thanks for any links/info.

Happy New Year to all!

 

ps - Have also posted this on another similar thread, but it seems to be in wrong location, so may not get seen?  (Mods?)





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02 Jan 2012 20:25 by cazzy Star rating in Inland Andalucia. 185 posts Send private message

 Rent to buy does seem to be catching on now, several of our sellers are now prepared to consider this option, and we have a few ongoing.  I think it is a good option that helps both buyers and sellers in these hard times. 





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03 Jan 2012 10:08 by Acer Star rating. 920 posts Send private message

IMHO as a generalism rent to buy substantially favours the purchaser and is a symptom of the soft market.  I came across the concept in Spain 8 years ago when a Spanish guy suggested he wanted to buy my property on this basis.  

It sounded OK initially but when we got into the detail I declined to proceed as it was all weighted in his favour.  He wanted to live there for 3 years, pay a basic rent which was fully refundable if he opted to buy.  In the meantime my cash was tied up with absolutely no guarantee of a sale and I was still responsible for maintenance, insurance etc.

Of course the terms and price are negotiable, but I reckon that as a concept it massively favours the purchaser.  He cannot lose.  If property prices collapse or he changes his mind he walks away, if they increase he does the deal, if they don't move he do what suits him - effectively he has a 3 year free "taste & try" period.

I'm not looking to sell, but if I were I would be extremely reluctant to go this route.  If obliged to I would also look very carefully at the selling agent's remuneration - a few seem to be pushing the concept quite hard, and I wonder why.





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03 Jan 2012 12:08 by growler Star rating in Birmingham & Benejúz.... 161 posts Send private message

Acer, you've described your own single experience as a negative one which is fair enough, but personally I wouldn't agree with your comments "as a generalism rent to buy substantially favours the purchaser"  or  "He cannot lose." 

Ironically, a more common perception is that the deals tend to favour the seller!.. but as with any transaction between two sides, the deal will only be as "good" as the terms agreed to, hence negotiation to satisfy both parties is the key.  

In your case the other party had no commitment (so had nothing to lose). If he'd agreed to pay above market rent (for example) then if he chose to walk away you'd at least have had something for your trouble. Unless both sides have some sort of stake or commitment in it, then it's likely to end in tears for someone.

As far as the selling agents renumeration is concerned then provided the agent is prepared to charge only if a sale actually takes place (so in your case agent would have had to wait 3 years to get paid) then it wouldn't seem unreaonable (to me) for them to charge a premium otherwise there would be little incentive in comparison to more traditional sales.  

Just another viewpoint on an interesting subject. Happy New Year to all  ;O)
 

 



_______________________
Kind Regards..Pat



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03 Jan 2012 12:22 by Acer Star rating. 920 posts Send private message

Growler, well I agree that "the devil's in the detail". 

Possibly for some, who are prepared to take the risk and wait for their dosh then this might be a solution.  But for most, unless you have an unfulfilled dream of becoming a landlord, getting the cash up front without uncertainties is massively better.

Surely also most people need the sale proceeds to finance their next purchase. 





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03 Jan 2012 13:09 by growler Star rating in Birmingham & Benejúz.... 161 posts Send private message

Hi Acer, it's interesting that you say "most people need the sale proceeds to finance their next purchase" as of course that's the traditional model most of us will have grown up with. The fact is, in the current times, that great big lump of money that we need for initial deposits, or perhaps trading up to a better property, or perhaps paying down the mortgage, or whatever... doesn't exist any more!, or it may as well not exist as the majority of people simply can't get access to it.

Whats the point of a potential seller being sat on a lump of paper money (equity) if they can never spend it? Even though it may seem perfectly logical for lenders to tighten up etc, the fact is it has virtually stopped the wheels of commerce from turning and without the ones at the bottom of the chain (first-time buyers) being able to get on board, no-one is going anywhere fast!

Hence, there has to be another way (see one example in next post)

      



_______________________
Kind Regards..Pat



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03 Jan 2012 13:13 by growler Star rating in Birmingham & Benejúz.... 161 posts Send private message

Susanspain, re you post about 6 posts further back, I've copied/pasted my response below from the other thread..


<< response posted by Growler >>
Hi Susan.. and a happy new year!
You don't mention any future mortgage, only that you have €7k to put down now (20% of €35k) but would be in a position to complete in only 12 months time? Does this mean you could raise and pay the balance of €28k over just 12 months?

Rent to Buy schemes regardless of which specific model you follow would more typically run for perhaps 3 to 5 years, even 10 years, doesn't matter as long as both parties are agreeable and the timeframe is more often than not governed by the buyers future chances of securing a mortgage.    

From what you've said, it sounds like your main aim is to avoid paying "dead" money on rent, whilst you gather the balance of funds together? If so, and you intend to proceed without lender finance then a better option for you may be "seller financing" (the seller allows you to purchase using monthly installments), which would work something like this..

1.  You agree price, say €35k and if you're getting a nice deal might offer to cover costs of vendors legals.

2.  You pay the €7k as initial deposit, via solicitors, on exchange of contracts (so are both now obligated to proceed)

3.  You setup an installment contract, via solicitors, to pay vendor the €28k balance, via (for example) 60 monthly installments (i.e. over 5 years). Rates would typically be based on a traditional mortgage amortization model, so cost-wise just as if you were paying a repayment mortgage to a lender. €28k over 5 years on a repayment basis would come out in the region of €530 to €550 per month (for rates in region of 5% to 7%).

4.   Advantages to vendor/seller

(a) Completion is delayed so only occurs after you have made the 60th installment, hence vendor holds title as security and  will be entitled to repossess etc if you default, in exactly same way a lender would (hence good legal representation is  paramount).  

(b) Total repaid will be higher than €28k (in region of 12%-15%)  

5.  Advantages to you/buyer

(a)  No need for bank approval

(b)  No 'fat cat' banker expenses to pay!  (but your legals would be more expensive than the norm)

(c)  Can proceed as quick as solicitors can act.

There will be those that say it can't be done or that it's in some way "dodgy" (often a good indication that they just don't understand it). In UK if it's not done correctly then FSA will be onto it so I'm sure similar safeguards/obstacles exist in Spain.

Let us know how you get on.

ps - if you do manage to find a half-decent place for €35k can you get me one please  ;O)

<< end of response posted by Growler >>


 



This message was last edited by growler on 03/01/2012.



This message was last edited by growler on 03/01/2012.



This message was last edited by growler on 03/01/2012.

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Kind Regards..Pat



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03 Jan 2012 13:33 by maddiemack Star rating in Grantham, Lincolnshi.... 195 posts Send private message

That's a fantastic plan, Growler.  I love the idea that the 'Banksters' (to coin a phrase used by Max Keiser) don't get a fat bonus.  We have been trying to work something out like this to sell our own property in the UK to our son. We'll look at it more seriously now.

Yes, we'd like one of those cheap places too!  There are loads in other areas, but very few in Andalucia.  Here, they usually refer to piles of stones on pieces of land out in the campo or apartments in areas where nobody wants to live.  If anyone knows of any real bargains where the taxman won't chase you for the extra tax that incurred if the property was sold for what they deem as the 'true' value......please provide us with the details...

Maddie



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03 Jan 2012 13:45 by Acer Star rating. 920 posts Send private message

Thanks for yours Growler - this example is a different proposition and one personally I might well accept as a vendor.  The 20% non refundable deposit is key - the example I encountered was just paying rent with the option for the purchaser just to walk away, without any penalty.

 

PS Of modest consequence, but why the "fat cat banker" comment by yourself and Maddie - the people that undertake mortgage business are just professionals doing a job for a reasonable fee.  They're nothing to do with the casino style city whizz kids who receive the obscene amounts.


 



This message was last edited by Acer on 03/01/2012.



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03 Jan 2012 17:04 by maddiemack Star rating in Grantham, Lincolnshi.... 195 posts Send private message

You may well ask a mortgage broker to arrange your mortgage for you and yes, they do earn their fee!  BUT, it isn't the mortgage broker that lends you the money to buy your property...it's the bank and there are very few mortgages around at the moment that are 'free' to take out.  Most mortgages today come with a fee to the mortgage provider.....over-and-above any monies paid to a mortgage broker or mortgage arranger.

 



This message was last edited by maddiemack on 03/01/2012.

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03 Jan 2012 17:21 by Acer Star rating. 920 posts Send private message

These are up front fees that reflect the market conditions.  The last mortgage I had included a £2,500 arrangement fee which included surveys and legals and was added to the mortgage amount.  All fully discosed and certainly no complaint from me given the current interest rate.  

As I say this just reflects market conditions - if the Bank of England rate was higher no doubt the fee would be less.





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08 Jan 2012 04:52 by Susanspain Star rating in Mijas, Malaga. 138 posts Send private message

Susanspain´s avatar

My replies in Blue ;)

Hi Susan.. and a happy new year! ‘Igualmente!’
You don't mention any future mortgage, only that you have €7k to put down now (20% of €35k) but would be in a position to complete in only 12 months time? Does this mean you could raise and pay the balance of €28k over just 12 months? Yes.. (with help from family member who is eventually going to inherit the property.) 

Rent to Buy schemes regardless of which specific model you follow would more typically run for perhaps 3 to 5 years, even 10 years, doesn't matter as long as both parties are agreeable and the timeframe is more often than not governed by the buyers future chances of securing a mortgage. We tried to get a mortgage initially, but as OH is over 60 (and receiving state pension), and I am self-employed (with less than 3 yrs trading/accounts), no one would give us a mortgage. Also, we were laughed at and told they would not give a mortgage for ‘less than 100K’ anyway as it was ‘not worth their time/the admin/setting up fees.’

From what you've said, it sounds like your main aim is to avoid paying "dead" money on rent whilst you gather the balance of funds together? , Yes  If so, and you intend to proceed without lender finance then a better option for you may be "seller financing" (the seller allows you to purchase using monthly installments), which would work something like this..

1. You agree price, say €35k and if you're getting a nice deal might offer to cover costs of vendors legals.

2. You pay the €7k as initial deposit, via solicitors, on exchange of contracts (so are both now obligated to proceed)

3. You setup an installment contract, via solicitors, to pay vendor the €28k balance, via (for example) 60 monthly installments (i.e. over 5 years). Rates would typically be based on a traditional mortgage amortization model, so cost-wise just as if you were paying a repayment mortgage to a lender. €28k over 5 years on a repayment basis would come out in the region of €530 to €550 per month (for rates in region of 5% to 7%).
Thanks. I will put this to our lawyer. We are arranging however, to put in a private contract 7K deposit on signing promise to purchase, 12.5K ‘if’ the Escritura application in court is accepted (the property has been sold 3 times on Compraventa only and has a Nota Simple in a dead persons name, so it has to go to court to be granted in our name, so a little ‘risk’, but one we have calculated could likely go in our favour, and if not, we will put in the contract the deposit we have paid is 3* yrs rent in advance. If yes, all OK /a go, the vendor is happy to wait until the 12 months is up (or longer if the Escritura application takes longer), to get the balance. (*Cheap for rent I know, but we feel the vendor has to take some of the 'risk' too as he is not prepared to sort out the paperwork first and is handing this over to us.)

4. Advantages to vendor/seller

(a) Completion is delayed so only occurs after you have made the 60th installment, hence vendor holds title as security and will be entitled to repossess etc if you default, in exactly same way a lender would (hence good legal representation is paramount).

(b) Total repaid will be higher than €28k (in region of 12%-15%)

5. Advantages to you/buyer

(a) No need for bank approval

(b) No 'fat cat' banker expenses to pay! (but your legals would be more expensive than the norm)

(c) Can proceed as quick as solicitors can act.

There will be those that say it can't be done or that it's in some way "dodgy" (often a good indication that they just don't understand it). In UK if it's not done correctly then FSA will be onto it so I'm sure similar safeguards/obstacles exist in Spain.

Let us know how you get on.

ps - if you do manage to find a half-decent place for €35k can you get me one please ;O)
 Re this G/others.... It ‘is’ possible (but only with a lot of determination, possibly some ‘risk’, a lot of patience, and a little bit of luck...;)
We have been offered several properties (all habitable with elec/water), but much further inland (all sadly too far away from our work on the coast ;)
Nearest one to coast we have been told about by local agent is near Alhaurin de la Torre. (Don’t have full details, but just Eu39k!!) 
Did see a 2 up 2 down in Alhaurin for Eu 33K, but it is on the ‘wrong side of the tracks;)’ lol!





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14 Jan 2012 11:10 by DonLochnagar Star rating in Mazarron. 161 posts Send private message

I've bought on an 18 month rent to buy contract and  year to complete.  With the way the Euro is going, I'm jumping for joy.





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16 Jan 2012 20:54 by ds8819 Star rating. 13 posts Send private message

 Hi,

pardon my ignorance as I'm no expert in these matters, but I would like to raise a point that maybe someone qualified in financial/tax matters might be able to answer.

I am relating to the UK now, as I am not familiar with property sales/purchases in Spain, but...

How is the 'rental income' treated for tax purposes? Would I be correct in assuming that it would be classed as just that... an 'income', and therefore taxable? or would payments be defined as 'payment on account', or 'advance stage payments' towards the agreed purchase price? 

 

From the UK perspective then, if this type of purchase agreement is entered into, does the rule of zero CGT still apply if it is your sole and only residence?





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16 Jan 2012 23:52 by DonLochnagar Star rating in Mazarron. 161 posts Send private message

Excellent questions.  I assume it be payment to account, at least that's how I would view it.  As far as i am concerned I am making the payment in stages with the final payment to be made within an agreed timeframe.





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17 Jan 2012 09:55 by ds8819 Star rating. 13 posts Send private message

I'ts my view also that it is a payment 'on account'.... sadly however, the taxmans view doesn't alsways concur with mine!





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18 Jan 2012 22:21 by mariadecastro Star rating in Algeciras (Cadiz). 8578 posts Send private message

mariadecastro´s avatar

 It depends on the way the contract is agreed:

-If you pay an initialamount for the option, this and rentals will be taxed with VAT 18%. Once the option is exercised, you will substract the amount paid at the beginning and will pay either transfer tax or VAT- depending on first of subsequent transmissions- at the applicable rate ( 4% or 7%)

- Same if you pay nothing at the beginning but the contract clearly stablishes that rentals wlll be counted as part of the price if the option is exercised.

- If the contract states that amounts are partially rent and partially will be considered part of the price. Each part will tribute correspondingly ( rentals- 18%,part of the price 4% or 7%).  If the option is not finally exercised the taxpayer will be reimbursed the amounts paid as part of the price and its corresponding taxes.

 



This message was last edited by mariadecastro on 18/01/2012.

_______________________

Maria L. de Castro, JD, MA

Lawyer

Director www.costaluzlawyers.es

El blog de Maria



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