When looking to buy a Spanish property there are many ways to structure the deal. You need to take into account price of course, but also the time period for final purchase, the amount of the deposit to be left and whether the property is sold with or without furniture is also important. However sometimes for whatever reason the property is bought with a deposit left and completion to be sometime in the future and during that time period a rental is paid on the property. So today we look at what you need to consider in a Spanish rent to buy property contract.
Firstly we must look at the agreed price and how it is to be paid. Let’s take an example of 200,000 Euros agreed price. On a normal contract a deposit of between 6 and 10k would be left and maybe a 60 day period for completion. On a rent to buy option contract the deposit is often a lot higher and is taken from the final price in its entirety. Therefore the option would maybe with 30k down. That money is generally lost if the sale doesn’t go through so obviously it shows commitment from the buyer. However just like in a normal contract if the seller pulls out then they have to return double the deposit.
The Monthly Rental
The monthly rental is usually higher than a straight rental because it is in the interests of both buyer and seller. The buyer reduces the final amount to be paid and the seller gets more money upfront before the final purchase. However there is one thing to work out that is important, does the whole amount of the rental amount come off the final price or just a percentage? We have had cases in the past where a part of the rental reduced the price and others where the whole amount came off it. The reason for only a part coming off is usually because there is a mortgage involved and the mortgage interest payments are covered but not the capital amount.
The Time Period
One of the most difficult things to gauge is the time period that both parties will be happy with before completion. Obviously the seller looks for a shorter time period and oftentimes this also suits the buyer. Nevertheless the seller usually wants more time to find the finance, whether saving or through a bank, for the final purchase. The final amount to be paid is less on longer time periods because the monthly rental payments have reduced the outstanding amount especially when the whole monthly rental is taken from the total
Costs of Upkeep
The costs of upkeep of the property such as electric bills, water rates and even council tax are normally passed onto the buyer because they are using the property from the first moment. Sometimes it is negotiated that the seller keeps paying the council tax until the sale goes through as they do not want any outstanding debts if the option contract fell through.
If the property is rented and sold with furniture then it is prudent to write into the contract a clause about wear and tear on the furnishings. For the seller it is useful to state that if damage occurs to the furniture then it is the responsibility of the tenant as they will eventually have full possession.
When shouldn’t you do an option contract?
As a buyer you shouldn’t really do an option contract if the owner has a high mortgage unless it is written into the contract that the money paid goes directly to the bank each month to cover the mortgage repayments and you can be sure before signing the contract to make sure that there are no arrears on the mortgage repayments that the bank already have on their books. This is because all the money paid out could be lost if the bank takes action to repossess the property. Try getting the deposit back from someone with already existing debts and whose property has been repossessed. It is likely to be nigh on impossible.
It is useful to check the property for any other debts too to make sure that nobody else will take the owner to court and foreclose on the property.
You also shouldn’t do an option contract on a property when you are not sure of your ability to pay at the end of the stipulated time period. The owner may well seem the nicest person in the world but if they are asked to extend the time period for purchase, change any conditions or to just add a few months on they may well turn into a problematic devil in disguise.
What are the upsides for the seller of an option contract?
The seller has various upsides when doing an option contract. The first is that they receive a lump sum upfront and yet they still have the property in their name. They also receive income over the period of time of the rental payments which in many cases can replace a lost salary through having lost a job. From a tax point of view an option contract can also be advantageous because it spreads the income over a longer period of time.
Also the property is maintained, payments are met by the buyer/tenant and even if the sale falls through the property is usually in a much better condition than when the option contract starts. Even if the tenant trashes the place (Totally unknown to me but I suppose it could happen) then the large upfront lump sum and any insurance policy would cover the damages.
What are the upsides for the buyer?
As previously stated the buyer gets a longer time period to find finance and pay. They have no worries about losing the property like they would have if they did a straight rental as the contract is watertight as regards their rights to stay in the property to the end of the lease period and then they have the right to complete. In a rising market they get a property for under the theoretical market price at the end of the time period and in a falling market or if their situation changes then they are not obliged to complete and can walk away having only paid the deposit and rental payments. They also have a greater feeling that the house is theirs even though they are renting.
Should you look for a house with the possibility of doing an option contract?
Obviously it depends on your personal circumstances and also your choice is restricted because most owners have no interest in doing option contracts. Those who do have an interest in doing option contracts are usually banks and other financial institutions and developers struggling to sell their stock of properties. However many of these deals are not the best you could find on the market. Sometimes it is better if a rent to buy option is your preferred choice to test out a private seller with the offer. They may be susceptible to doing one even if they have never heard about the process before.
Contact us below for more information and to tell us more