Rent to buy contract: how it works and what you should pay attention to

The rent-to-own contract is gaining popularity as a convenient way to purchase a home without the need for an immediate mortgage. This type of contract benefits both the tenant and the owner.

What does this type of contract consist of?

In a rent-to-own contract, the tenant rents for an agreed period and at the end of that period, has the right to purchase the property for a pre-agreed price. The amounts paid for rent are totally or partially discounted from the final purchase price, as agreed. This type of contract includes both the rental contract and the conditions of sale.

The tenant is not obliged to buy the property, he can withdraw, but he would lose the purchase option premium that he has paid as guarantee.

The advantages and disadvantages for both the tenant and the owner.

For the tenant, the benefits include:

• Do not need a large financial cushion.
• Having financed part of the property through rent.
• Have time to assess whether the home meets your expectations.

However, the disadvantages are:

• The loss of premium and rental fees paid if he decides not to buy.
• The possibility of increases in the rental price.

For the owner, the benefits include:

• The ease of renting instead of selling.
• Have tax incentives and secure the rental, since non-payment invalidates the purchase option.
• A decline in the real estate market would not affect the benefits at the time of sale.

The disadvantages for the owner are:

• The inability to dispose of the home immediately if you need liquidity.
• The restriction to sell it at a higher price than agreed or to another buyer, even if they offer more money.

The fundamental aspects that must be included in these contracts

• Regarding the rent: duration of the lease, term to exercise the right to purchase, monthly installments, who pays community expenses and taxes or who is responsible for reforms or improvements.
• Regarding the purchase and sale: final sale price, percentage of the rental installments that will be deducted from it and the amount of the initial premium.

Other important issues to take into account are the possibility of extending the rental contract, the exclusivity of the tenant to purchase and the option to make the purchase before the end of the rental contract. Apart from the fact that the purchase option can be lost if two months of rent are not paid.