RENT THE HOUSE WITH OPPORTUNITY TO BUY THE HOUSE, AN ANOTHER WAY TO ACCESS RENTAL HOUSES AFTER THE PANDEMIC by Jacques Olivier Marbella
Because of this pandemic, many people had suffered a financial crisis. With the changes in the evaluation of houses constructed by the bank of Spain which will cause reliable homebuyers who do not have enough savings to get access to a mortgage. In this case, the house which is first rented and after some time can be bought is a good option to boost-up the real estate market of Spain.
Everyone bank in the world is aware that COVID-19 will hugely effect the real estate transactions, similarly, The Bank of Spain was also aware of this situation. The bank of Spain had sent the official letter to the main evaluated different associations throughout the country on April 20, raising the warning of emergency regarding establishing prices of the rightful market due to this deadly pandemic and which will result in maybe fall in the price of housing in future months.
The letter which was sent by the bank suggested the reviewers use another valuation method to standard comparing method, which is in control of the supervisor and construct that a reviewer needs to compare a minimum of six other homes to calculate its real value. Now, the new technique is in process, at the request of the Bank of Spain, which is called ‘rent update technique’. In which, any house value can be obtained from by seeing its rental income, by applying in future calculations for how much period the house is being rented and with what rental income.
Financial experts had warned all the reviewers that there will befall in the consideration values of different houses, which is resulting in the new mortgages putting them on conceding, which is due to insufficient savings of so many clients to compensate for reducing in financing. The only method to buy such property will be to make a good negotiation with the seller in terms of its price.
If negotiation gets failed, another option is renting the house with the power of buying the property. In this, a lease will consist exclusively clause that empowers the tenant to buy the home after renting it. The tenant has the right that he/she can buy the property within the established period and price which is agreed on with the owner of the property, however, it is not a commitment.
In the rental contract, the option which empowers tenants to buy the property, it only develops duties for the landlord. The landlord will force the tenant that does not transfer papers of lease and while still keep the sale offer during the period of the agreed term. the tenant may also agree to pay the landlord a premium amount for granting them the buying rights option. However, if the tenant does not exercise it, the amount will not be returned.
The most interesting option is that, in the contract of the rental agreement, it can be established that the rental amount which is being paid, can be deducted at the time of purchasing the house. Throughout the rental period, the purchasing option may or may not get extended, however, once the rental period is expired, it will not get extended.
Benefits of rent to purchase property for the tenants
Whenever the person buys the property they do not know if they fit according to their expectations or not. However, in rent to purchase the case, a person can rent a house first and if he/she get satisfied with the property they can buy it later. If they do not like the property, they can end the contract without moving to purchase it. however, they can boost-up the maximum years of terms for rent which is five years.
The period which is assigned the tenant to practice the option, the tenant which is the future buyer of the property, will have enough time to see for mortgage financing, which is needed.
The price of the homes increases from time to time, however, in this situation the price of the home will be the same also for the future. So, if the prices of properties are increased, the tenant who is a future buyer, will not be affected by the increase in the price. However, if the price of the house falls from the agreed one, the tenant can give upon practicing the purchase option, because the price gets low from the agreed one. The owner of the properties will always attract interested people, with this rent to purchase option, who would buy their property.
Disadvantages of rent to purchase property
If the owner has a priority to sell the house, in this type of contract it does not guarantee if the seller will take place or not. It is much worse for the apartment then for the expected sell, as it needs to recover from the poor lease state. Maintaining the sell offer during this period can be hinder. Because the owner will always find the possibilities of selling the property with other possible valuable parties.
The last amendment in the rental law, the minimum extension term for housing rental agreement is approved. Conditions that the property owner assumes also get approved. At the begging of the lease, if two years were granted for the purchase option, and after this duration gets expired, the tenant will have three more years for paying the rent. This matter should also keep in mind.
Rent to purchase taxation option is not favorable
It is a procedure that pays for rents and purchases.
Tax for Rent
Whenever the tenant rents the house, he/she must need to pay the rent as well as the Property Transfer Tax (ITP). This tax is calculated by applying the rate present in the law to the agreed rent on the contract. If the property is rented for business or an office the rent will be considered as Value Added Tax (VAT).
Not only the tenant but also the landlord will pay the income tax which is being received from real estate capital from his/her end from the rental income is being received from the tenant.
Purchase option Tax
This procedure is related to the ITP, which needs to be paid by the tenant. This tax will be calculated by the amount which is paid for granting the option of purchase which is the premium amount or 5% of the sell amount if the amount of premium is low. After buying the property (using the purchase option) the buyer will now pay the transfer tax on the whole price.
If the home is a newly constructed, the right for this option and subsequent sell are related to VAT.
The capital gain must tax in personal income tax by the owner of the property. If the purchase option is used by the tenant, now new capital gain for the seller will be generated in terms of the sale of the property. However, if the landlord had given a discount on premium pay and rental income from the selling price, such a case will add up to a lower rate for calculating the profit.