What is a rental purchase in real estate?
A large part of the population dreams of owning their own home. Among young adults in particular, there is a desire to own their own home. The reasons for this are mainly the independence or the large living space that comes with owning your own home. While the desire to own a property is widespread, not everyone can afford it. So that financial hurdles do not stand in the way of long-term living in one’s own four walls, interested parties resort to the so-called hire purchase. We explain what a hire purchase is, whether it is a profitable alternative and what risks you should expect.
What is a hire purchase?
Simply explained, hire purchase – as the name suggests – is a combination of renting and buying a property. People who make a hire purchase first rent the property and can then buy it. With the conclusion of the rental contract, the tenant is already granted the right to purchase the occupied property after a certain period of time at a defined purchase price. The amount of the purchase price depends on the rent paid beforehand, which already covers part of the price, so that only the agreed remaining sum has to be paid when buying.
Classic hire purchase vs. option purchase
Hire purchase of real estate can be carried out in various ways. A distinction is made between the following two models: classic hire purchase and option purchase.
What is a classic hire purchase?
In the case of a classic lease-purchase, the landlord and tenant expressly stipulate upon conclusion of the lease-purchase contract that the property will be transferred to the landlord or the buyer under certain conditions. The purchase at the end of the rental period is therefore a fundamental feature of the contract.
What is an option purchase?
In contrast to the classic lease-purchase, with option purchase the tenant only receives the option to purchase the rented property after a certain lease period. This model therefore allows the tenant greater freedom of choice, whereby the tenant still has the option of deciding against the purchase at a later date, as he is not obliged to purchase.
The differences with regard to the purchase following the rental phase are reflected in the financing. With the classic lease-purchase, the tenant makes a one-time down payment, which is usually up to 20 per cent of the purchase price. In addition, by concluding the hire-purchase agreement, the tenant undertakes to be able to pay the remaining purchase price at the end of the period at the time of the final property purchase. Furthermore, a closing fee is often due, which must be paid by the buyer.
With an option purchase, the tenant usually has to pay higher monthly rents. Despite the option of not concluding a purchase, the tenant can thus ultimately also be bound to the purchase. After all, tenants are reluctant to pay disproportionately high rents without being able to derive any added value from them. Thus, many tenants decide to buy the occupied property afterwards, even with an option purchase.
The typical steps of hire purchase
To clarify what a hire purchase is, let’s look at the four steps that make up the hire purchase process by default.
1. Conclusion of the hire-purchase agreement
At the beginning of every hire purchase is, of course, the signing of the hire purchase contract. The contract, which is concluded directly with the landlord, contains all the important conditions of the hire purchase. Among other things, it specifies the rental period after which the tenant can buy the property.
2. Payment of the financial contribution
At this point, you as a tenant must also pay a financing contribution to the landlord, which serves as a down payment. If you decide not to buy the property in the end, you must expect to get only part of the down payment back. This one-time down payment can amount to up to 20 per cent.
3. The rental phase
In the rental phase, you rent the flat or house according to regular tenancy law. As a tenant, you pay a rent to the landlord that has been set in advance in the contract. The rent payments are to a large extent credited against the purchase price.
4. The decision
f the agreed rental period has expired, you have various options. For example, you can decide to continue living in the property as a tenant or to terminate the tenancy. Of course, you also have the option to buy the property.
When is a hire purchase worthwhile for real estate?
The question of whether a lease-purchase agreement for real estate is worthwhile cannot be answered in a general way. When deciding for or against such a contract, factors such as your personal situation, your financial resources and the respective conditions play an important role. Since a hire purchase also has some risks, you should therefore seek professional advice in advance and weigh up the pros and conscientiously. Here are some points for and against making a hire purchase:
The advantages of hire purchase
- You are independent of a bank and do not need to take out a loan for financing.
- You do not need a large amount of start-up capital.. You can save equity during the rental period in order to make the purchase afterwards.
- You enjoy flexibilitybecause you do not have to decide to buy immediately. Flexibility is especially given with the option purchase.
- With an option purchase, you get the opportunity to test the property before making the important decision to buy.. This way you can make sure that you really want to buy the house or flat. In addition, any defects in the property can be uncovered during the rental phase.
The disadvantages of hire purchase
- Hire-purchase properties often do not pay off financially. . You can often find cheaper bank loans and more attractive rents. In addition, there may be other fees associated with hire purchase.
- Tenants must remain solvent.. Even if, in contrast to a direct purchase, no high start-up capital is required, it must be guaranteed that tenants can pay the comparatively high rents as well as the remaining purchase price. Have you made a commitment to purchase and are unable to follow through? In this case, unfortunately, you do not have the right to reclaim the previously paid rents.
- SOften, less attractive properties are offered for lease-purchase.. In this way, property owners try to get rid of hard-to-sell properties anyway.
- Hire-purchase models are sometimes dubious.. The various options for hire purchase sometimes differ greatly from provider to provider, making it difficult to compare the conditions. In addition, you should beware of dubious offers.
Conclusion
If you are considering a lease-purchase, you should inform yourself in advance about your options and the various conditions. Contact real estate experts such as ADEN Immobilien for advice on topics related to renting or buying real estate.
