Deciding to buy a home isn’t usually easy, because once you take that step, there’s no turning back. That’s why it’s important to visit the property several times beforehand and make sure it has everything you need to meet your expectations, so you don’t run into any unpleasant surprises once you start living there.

Despite this, there are still cases of individuals and families who, sooner or later, realize they made a mistake when buying their home. That’s why today on our blog we want to tell you about a truly interesting option for those buyers who are more indecisive and looking to minimize the risk of making a mistake: the rental with an option to buy.

What is a rent-to-own lease?

Usually, we’re used to choosing one option when we’re looking to move. On the one hand, there’s renting if we want quick access to a home and don’t plan to stay in the same place for very long. On the other hand, there’s buying if we’re looking for stability in the medium and long term, as well as a return on our investment.

However, we often forget that we have a third option that combines the most appealing aspects of both: a lease-to-own agreement. Basically, this option involves signing a lease agreement that also includes the option to purchase the property within a specified time frame, thereby offering both flexibility and security for both parties involved.

At first glance, a rent-to-own lease has all the characteristics of a standard lease agreement, as it sets forth the rights and obligations of both parties (landlord and tenant) so that the property can be transferred under this type of arrangement. However, in this case, it also includes a clause specifying the conditions under which the tenant can purchase the property.

Specifically, this section states that, during the period specified in the lease agreement, the tenant may notify the landlord of their intention to purchase the property. In that case, the tenant must pay the price previously agreed upon in the lease-to-own agreement, but deducting (in full or in part) the rent payments made up to that point.

Thus, a lease-to-own agreement is essentially a hybrid contract, as it consists of two parts or sub-agreements: the initial lease agreement and the agreement regarding the option to purchase.

What is the period of validity for these rent-to-own leases as stipulated by law?

There are no specific regulations governing rent-to-own contracts, but the rental portion is covered by the Urban Lease Law (LAU). Therefore, it is very important that both the terms of the sale and the intentions of both parties be clearly detailed in the clause governing the transaction.

All of this means we must refer to the LAU to determine that lease agreements—and , therefore, also those granting the right to purchase— may have a maximum term of 5 years (7 if the landlord is a legal entity). However, this period may be extended if both parties agree; therefore, it is also essential that both parties set forth the new terms in writing, especially if they pertain to important aspects such as the rent or sale price, the new terms established, or the conditions of sale.

If there are no changes to the terms of the agreement and no new contract is signed, the initial agreement would be automatically extended for one-year periods until it reaches another five or seven years, respectively.

What information must be included in the specific sales clause?

A lease-to-own agreement must include the following basic information to specify the terms of the sale:

• An agreement between both parties to complete the real estate transaction at a later date if they so choose.
• The definition of the real estate property covered by this lease-to-own agreement.
• The agreed-upon price for the sale of the home.
• The period during which the tenant may exercise the option to purchase the property. Normally, this period is the same as the term of the lease and may never exceed it.
• The amount of rent paid during the term of the lease, which will later be deducted from the total price of the home if the purchase option is exercised.

How do I notify the landlord of my intention to buy the rental property?

If the tenant decides to purchase the property during the term of the rent-to-own lease, he or she must notify the landlord. To do so, the tenant must use the communication channel specified in the lease, if one was previously established.

Advantages of a Lease-to-Own Agreement

For the homeowner

Not many property owners consider the possibility of entering into this type of contract to maximize the return on their property. But it may be of interest to them for the following reasons:

• For the duration of the lease agreement, the property owner receives the stipulated rent.
• If the tenant decides not to exercise the purchase option, the landlord may retain both the initial deposit and the rent payments that were made.
• If the tenant decides to buy the home, the owner will not need to put it back on the market and will receive an immediate profit from the sale.
• The tenant will take special care of the property, given the possibility that it may eventually become his or her own.

For the tenant of the residence

Given the nature of a rent-to-own lease, the tenant stands to benefit the most. Here’s why:

• During the term of the lease, you’ll be able to “test out” the apartment and find out if it really offers everything you’re looking for.
• That gives the tenant plenty of time to make a final decision, which is especially helpful if, upon moving into the property, the tenant is unsure about their future or does not yet have the necessary funds to purchase it.
• You can apply to purchase the home at any time, since you don’t have to wait for the lease to end.
• Priority in the event that the homeowner decides to sell the property at some point.
• Any rent payments you make will later be deducted from the total price of the home if you exercise the purchase option. Therefore, this type of rental can also be viewed as an investment.
• Easier access to a mortgage, since the price of the home will gradually decrease as previous payments are made.
• Stable home prices: The purchase price is stipulated in the contract at the time of signing, so it is “locked in” and will not be affected by future market conditions. This is a particularly attractive feature in a situation like the current one, where home prices are on the rise.

Disadvantages of a Lease-to-Own Agreement

For the homeowner

Naturally, this type of lease agreement is not always entirely beneficial for one of the parties. In the case of the property owner, these are the factors that may lead them to propose other options to the prospective tenant:

• This is an exclusive temporary arrangement, since if the tenant decides not to buy the house once the lease ends, the owner will not have been able to sell it to a third party while the lease was in effect.
• The sale price may be lower than the market price, since the transaction will be completed at the price agreed upon previously, not the current price. As a result, it is quite likely that the seller will not receive as much money as they could have if the agreement had been signed just before the transaction.
• Uncertainty, since the decision regarding housing rests with the tenant.

For the tenant of the residence

From the perspective of the person moving into the property, these are the three aspects of a rent-to-own lease that may be less appealing:

• Significant tax burden, since signing a dual-purpose contract also entails double taxation in the form of the Property Transfer Tax (for both the lease and the purchase option).
• If, at the end of the lease, you decide not to buy the home, you will lose the money you paid at the beginning as a deposit.
• Failing to finalize the purchase means “losing” the money you’ve invested in the home so far. In other words, the rent you’ve paid will have only served to cover the rent, but not to reduce its cost.

Factors to Consider When Signing a Lease-to-Own Agreement

To properly draft the aforementioned contract, it is important for both parties to keep the following in mind:

• It is not mandatory to require a deposit at the time the agreement is signed, although this can be particularly valuable to the property owner because it ensures that the tenant is genuinely interested in purchasing the property.
• During the term of the contract, the purchase price cannot be changed, but the rent can. This is because the law allows landlords to increase their rent in line with the CPI.
• Both parties may register the rent-to-own lease agreement with the Property Registry. In this case, they must specify in the document the purchase price, the transaction premium, and the time limit within which the tenant may exercise this right.

The Benefits of Renting and Buying Under a Single Contract

This concludes our comprehensive guide to rent-to-own leases. As you can see, these are a particularly attractive option for those looking for a home but who aren’t yet sure about their medium- and long-term future. This way, they can immediately enjoy the benefits of renting while securing the right of first refusal to purchase the property in the future, provided their personal and financial situation is suitable.

We hope we’ve cleared up any questions you may have had about this, and remember, if you’re in the middle of looking for your new home, don’t hesitate to contact us. At CULMIA, we can help and guide you so you can make one of the best decisions of your life right now. We look forward to hearing from you!

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