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The rent-to-own contract is becoming more and more popular.

It makes it easier to take the first step towards purchasing a home without the need for a mortgage, at least initially. But not only for the tenant, it also offers interesting advantages for the owner.

We tell you how this type of contract works, the pros and cons and what aspects need to be included.

What is a rent-to-own contract?

The rent to own contract is a formula that allows the tenant to live in a rented property for a period of time previously agreed upon in a contract. At the end of the contract, the tenant will have the right to acquire the property for a price previously agreed with the owner.

The amounts paid as rent are totally or partially discounted from the final price, as agreed. It must be taken into account that the rental contract with option to buy is not a conventional contract, it is double. On the one hand, it includes the rental subcontract and, on the other hand, the conditions of the sale and purchase.

In any case, the tenant is not obliged to purchase the property, he can withdraw. But it would mean losing an amount that is usually requested as a guarantee: the premium of the option to purchase.

Advantages and disadvantages of the rental contract with option to purchase
For those looking for housing
For the tenant, this formula represents interesting advantages:

It is not necessary to have a financial cushion.
When the time comes to take out a mortgage, part of the property will already have been financed, so the amount of the loan will be lower.
Renting gives you time to assess whether the property meets your expectations.
On the other hand, it also has some disadvantages:

If you finally decide not to buy, you will lose the premium and what you have paid in rental installments.
The agreed sale price is fixed, but the rent can be increased.
For the owner
This type of contract also has advantages for the owner:

Renting is easier than selling and has tax incentives.
The rent is assured, since non-payment invalidates the option to buy.
A downward trend in the real estate market will not mean losing profits at the time of sale.
As for the disadvantages, two are worth mentioning:

You cannot immediately dispose of the property. If, for example, you need liquidity, you must wait until the end of the contract and hope that the tenant buys or not.
It cannot be sold for a price higher than the agreed price and neither can it be sold to another buyer, even if he offers more money.
What should a lease with option to buy include?
It is very important not to leave any loose ends. The contract must include in detail some fundamental aspects:

Regarding the rental: 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 sale and purchase: final sale price, percentage of the rental payments that will be deducted from the rent and the amount of the initial premium.
Other important aspects in these contracts
In addition to the above, there are some other issues specific to a lease-purchase contract:

The lease can be extended if the landlord agrees.
The tenant has the exclusivity of the purchase, unless waived.
The purchase can be made before the end of the lease.
The option to purchase can be forfeited if two months' rent is not paid.