Rent-to-Own, a different solution to buy a home

12/10/12

By: Andrea Guillen Alpízar

www.CostaRicaLuxuryEstates.com & www.CostaRicaMillionDollarHomes.com

A typical rental in Costa Rica is done by a contract between two parties, Landlord and Tenant. The tenant has a term of up to three years to live in the property, with the possibility to renew the contract annually if desired. However, more and more clients, both owners and buyers want to learn more about the figure of the Rentals with Purchasing Option. This method sometimes doesn´t work very well because the game rules are not correctly addressed from the beginning and the contract is at the end a typical rental agreement, where the owner is not able to complete the sale of the property and the tenant sees all of the money paid simply applied to the rental price. Our experience has been that a Rental with Purchasing Option Agreement can work very well for both parties if the rules are clearly defined from the beginning of the relationship and well established in the contract. Here are three key ideas of how to define simple rules for both sides, which can be beneficial for both parties at the end:

1.      To negotiate the sales price from the beginning and put establish it in the contract. Another thing that can work is give the tenant a First Right of Refusal from any other serious offer that could be submitted to the owner during the rental period; however this leaves the gate open to the possibility that the proposed sales price may not be attractive to one of the parties involved, depending on the conditions of the market at the moment.

2.      To request a down payment applicable to the Purchasing Option Agreement for the property. This payment can be negotiated between the parties, whether the owner requests a percentage or a specific amount that is achievable by the tenant. Buying clients must have into consideration that in the event they ask for a loan from a bank, these entities generally provide an 80% loan based on the property valuation done by the bank, so been able to gather during the first year that 20% of down payment is important in order to reduce additional costs and that the approval of the loan is done faster. It is recommended that the initial payment starts from 5% up to 20%,however the owner must be flexible to negotiate this amount depending on the initial payment capacity of the client.

3.      Part of the monthly payments for the first year rental can be applied to the down payment. This way the owner can present options to the tenant in order to facilitate a faster sale during the first year of the rental contract. For example if the tenant purchases the property within the first 3 months, 75% of the monthly rental paid will be applied to the down payment, if the tenant purchases the property between 3 and 6 months from the signature of the agreement, 50% of the monthly rental paid will be applicable to the down payment, if the tenant purchases between 6 and 9 months, 25% of the monthly rental paid will be applicable to the down payment, and at the last stage if the tenant purchases between 9 and 12 months, 10% of the monthly rental paid will be applicable to the down payment. If at the end of the 12 months the tenant has not bought the property, the Option to Purchase is not valid anymore and the owner can renegotiate the terms of the sale again for the next year's rent. This way, there can always be a possibility that the owner sells and the tenant and achieve the goal of buying.

4.      Sometimes the property owner requires that the deposit is non-refundable so that the buyer gets really committed to complete the purchase of the property. On the other hand, this helps the seller absorb the risks of taking the property out of the market during the time of the contract.

When entering into a lease to purchase agreement, owners should also remember that the commissions of the rent and sale to the realtor is also part of the aspects that have to be considered. The real estate professional gets a rental commission for the rental contract and a sales commission once the purchase is done, but in the case the sale is done during the first year period, the owner can negotiate with his realtor to reduce the portion already paid as rental when paying the sales commission. This point must be negotiated between the two sides since the beginning of the negotiation process and establish it within the contract. It should be considered that the sale might take from 1 up to 3 years to complete. Owners should also consider that after the second year of renting, sales commission for the realtor would be complete without the reduction of the already paid rental commission, since the first year's rent was done regularly and the rentals were in favor of the owner.

When you start a process like this, it is recommended that owners are legally adviced on the clauses of the Lease with Purchase Option to achieve a smooth transaction from the beginning. A recognized attorney should be looking after all steps of the drafting of the contract in order to make sure all aspects are considered in the contract. This is a newfangled way in which an owner can have a monthly income and the down payment on the property as security for a possible sale, and tenants can have a choice to become homeowners.

It is important to clarify that this could work if the property is not occupied by the owners, because we have had cases where a property is only for sale and the owners are living in the property, but a client comes saying he wants to rent the property and has the capacity to buy it within a short timeframe period, so he wants to rent the property meanwhile he gets the funds lined up. The risk is that the tenant ends up staying in the property up to three years and the sale is never completed, which can result in detriment of the property owners because of all the factors involved.