Lease-purchase: Option for tenants who aspire to home ownership but can contribute little or no equity.

The idea of lease-purchase is actually simple: First, a lease agreement is concluded, and later the leased property becomes the property of the tenant. The purchase price for the apartment or house is already agreed when the lease is signed. While you are already living in the apartment or house, you pay rent that already includes a savings amount for the subsequent purchase. When you buy, the amount saved up to that point is offset against the purchase price. The seller retains part of the monthly payment as rent.

Thus, lease-purchase is an alternative to traditional real estate financing for many tenants who want to own their own home but have little or no equity to contribute. Nevertheless, it is important to inform yourself carefully beforehand: This is because hidden costs and overpriced prices can make a lease-purchase more expensive than a real estate purchase with construction financing.

How does a lease-purchase work?

First of all, the lease purchaser and the seller must agree on the amount of the rent and the purchase price. Both happen when the lease-purchase agreement is concluded. This contract is usually concluded for ten to 20 years and must be notarized, as with all real estate purchases. Costs are incurred for this. In the case of an option purchase (see below), an entry must also be made in the land register, for which a notary must also be commissioned.

The landlord/seller keeps part of the rent as rental income, the other part is offset against the subsequent purchase of the property. In the lease-purchase agreement, however, it can also be agreed that the entire monthly rent is offset against the purchase price. In most cases, a down payment of around 20 percent of the purchase price must also be made.

When the rental period has expired, the tenant can buy the property for the remaining residual value. If no residual value has been agreed, the property is paid off via higher rental payments or a longer term - and then automatically passes to the buyer at the end of the rental period. However, if you as the tenant get into payment difficulties, the seller has the right to terminate the lease under the terms of Section 543 (2) No. 3 of the German Civil Code (BGB). In this case, not only would your already paid-in amounts be gone. You would also no longer be able to buy the apartment. Moreover, the landlord/buyer could claim damages against you for the loss of rent.

Pros and cons of lease-purchase

First rent a house or an apartment, then buy it: This variant of a real estate purchase sounds attractive to many at first, especially since a part of the rent immediately flows into your own home as an investment; in the end, only the outstanding amount has to be paid. But at second glance, expenses can reveal themselves. There are also hardly any subsidy options with this model.

Pros:

• Low equity requirement: The purchase of a home is possible with a lease-purchase even with low income, no bank loan must be taken out. First, only a rental agreement is concluded. A lease-purchase would make it possible for young and low-income families in particular, who would not be able to bring in any equity capital in the case of a "classic" real estate purchase, to acquire a home, and comparatively early on.

• The rent remains stable: Unless increases are contractually agreed, the monthly rate remains unchanged throughout the term of the lease-purchase agreement. This means that buyers are independent of interest rate and rental price developments. In addition, they can participate directly in the development of real estate prices, which otherwise only accrues to landlords. The lease-purchase payments made over a fixed period are fully credited against the purchase price. This gives lease-purchasers planning security for their housing costs.

• Asset accumulation and retirement provision: The lease buyers are put in a position to build up the capital they need with a view to their old-age provision. With the real estate acquisition the economic property goes immediately to the buyers. From then on, they have assets that can additionally increase their retirement income at a later age by converting them into a life annuity. Alternatively, the assets can also be used to finance a potential need for long-term care, as the statutory long-term care insurance only offers partial protection and the remaining costs have to be financed privately. An appropriate owner-occupied property is also protected from being sold if benefits from the basic income support scheme should be claimed.

• Contractual transfer to third parties possible: In the case of lease-purchases, it can be agreed that the contract can be transferred to a third party. If necessary, the rents paid will then be credited to this third party and thus all rights and obligations will be transferred.

• Option purchase: Cooperatives often also offer the so-called option purchase, in which the option to purchase real estate is simply granted upon conclusion of the lease agreement. Usually, a period of up to 25 years is granted, after which the home can be purchased at a fixed price. In other words, there is no obligation to buy it, so the purchase can ultimately be declined.

Cons:

Little choice: Lease-purchase is offered rather rarely, so the selection of available properties is much smaller. Commonly, they are private providers, however, there are also offers from cooperatives and developers.

No top class properties: Often, houses and apartments available for lease-purchase are in rather unattractive locations or in less than perfect condition. Since these properties are difficult to sell, many providers try to sell their property this way.

Bank loans are mostly preferential: Financial terms are usually worse than with a bank loan because rents are higher than the local comparable rent and other costs, such as closing fees, are incurred.

Contingent payments: You bear higher renovation and modernization costs than normal tenants because the real estate already becomes your economic property when you sign the purchase agreement. As a result, you will have to save extra money for such measures and pay it to the landlord on a pro-rata basis if necessary.

Right of co-determination: You only get a say, for example in renovations, once you have paid the full purchase price, therefore becoming the legal owner. However, this does not apply if you have contractually regulated the right of co-determination in your favor.

No government subsidies: Only in case of modernization you might be able to benefit from a state subsidy by the KfW.

Consequences in case of payment difficulties: If you cannot meet your payment obligation, you also have no right to get your previously paid money back. In such case, not only would the property be gone, but also the money you have paid so far. In addition, the seller can claim damages from you. The date from which you fall into arrears and the period of notice with which the contract can be terminated will be specified in detail in the hire-purchase agreement.

Insolvency risk: If the seller becomes insolvent, the money is also gone. A contract can stipulate how the already paid-in sum is to be handled in such a case. It is also possible to have a so-called priority notice of conveyance entered in the land register as the potential owner. This means that the landlord cannot sell or encumber the property again, and you can secure the right of first refusal.

For this reason, a lease-purchase can prove to be riskier and more expensive than a "normal" real estate purchase. Therefore, it should be carefully considered whether the advantages outweigh the negative aspects.