The COVID-19 pandemic and the potential economic crisis in Spain caused by it, together with some changes in property valuations made by Banco de España (the Bank of Spain) are just some of the reasons why potential house buyers in Spain without sufficient savings will not be able to access a mortgage. Therefore, rent to buy in Spain, i.e. renting a property with the option to buy it after a certain period of time can be a good alternative to reactivate the real estate market and a great option for potential buyers.
Changes in valuations and mortgages
Banco de España, aware that the coronavirus crisis was going to cause a halt in real estate transactions in Spain, sent a letter to the main property valuation associations in the country in April, in which it warned of the difficulty of establishing a correct market price due to the state of alarm and the possible fall in the price of housing in Spain in the coming months.
In the letter, it is recommended that property valuation associations use alternative valuation techniques to the traditional method of comparison, which is regulated and establishes that a property must be looked at with at least six other comparable properties in order to calculate its value. One of the new methods being used at the request of the Banco de España is the 'rent update method', which consists of obtaining the value of the property based on rental income, applying future calculations such as how long the property could be rented for and with what rental price.
Mortgage experts warn that a fall in the value of home valuations is putting the granting of new mortgages in jeopardy due to the lack of savings of many customers. The only way of getting ahead with a purchase would be to negotiate the price with the seller.
However, another option that is becoming increasingly popular in Spain is rent to buy, which consists of a lease contract that introduces a clause that exclusively entitles the tenant to buy the property. It is a right (not an obligation) to buy within an established period and for a price agreed upon with the owner of the property.
Rent to buy in Spain, sometimes known as rent-to-own, has many financial advantages in this economically instable period for many families. But is rent-to-buy in Spain worth it? And what about other advantages and disadvantages of rent to buy in Spain in 2020 after COVID-19? Let's have a look with Salvador Salcedo from the law firm, Ático Jurídico.
The advantages of renting with the option to buy
One of the main advantages for the tenant is to be able to enjoy the property before buying it and, therefore, seeing if it meets expectations or not. In case the tenant is not interested, then they can always let the term pass without making the final purchase, but in the meantime they can use up the maximum term of five years of rent, a good option for those needing a new rental option in coronavirus times.
In addition, during the period granted to potentially buy the property, the future buyer also has enough time to seek mortgage financing, if necessary.
Another benefit for the tenant is that the price of the future purchase of the property is fixed in advance, so if prices rise within five years, the future buyer will not see the purchase price of the property increase. However, this works both ways and if the price of the house were to go down, then the buyer would be able to renounce the option of purchase if the agreed price is considered excessive. "The owner of the property will attract interested parties with the purchase option potential, i.e. those who otherwise would have ruled out buying a house ," adds Salvador Salcedo.
The disadvantages of renting with the option to buy
As with everything, there are also disadvantages of rent to buy properties. One of the main disadvantages for the owner is that, if their priority is to sell the house as soon as possible, this type of contract does not guarantee the sale. "It's not ideal if the expected sale falls through, but it's even worse if the property is returned to your hands after the lease in a worse state than the one it was originally given in," says the lawyer at Ático Jurídico. In addition, maintaining the offer of sale during the agreed period may be a handicap, because the owner will reduce their chances of sale to other potential buyers.
Rent to buy taxes
The taxation of rent with the option of purchasing the property is not favourable and is a taxable operation for both rent and purchase:
Taxes on rent: in the event that a property is rented, the tenant is obliged to pay Transfer Tax (ITP) and the amount is calculated by applying a rate provided for by the law to the agreed rent .The lessor, on the other hand, will be taxed on IRPF income tax for the rental income received.
Taxes on the option to purchase: this operation is also subject to Transfer Tax, to be paid by the tenant. The basis for the calculation of the tax will be the amount paid for the granting of the option right (premium), or 5% of the sale price if the premium paid is lower. If the property is finally transferred, after taking advatage of the purchase option, then the purchaser will one again pay Transfer Tax on the whole price. In the case of a new property, the right of option and the subsequent sale are subject to VAT.
The owner and lessor must pay the capital gain in the IRPF income tax. If the purchase option is taken advantage of then the sale of the property will generate a new capital gain for the seller. "If the premium and rental income paid is deducted from the sale price, these concepts will constitute a lower transfer value for the calculation of the profit", concludes Ático Jurídico.