Buying an apartment is a great option

Hire purchase

The principle of hire-purchase is very simple: First, a rental agreement is concluded, in which the rental property becomes the property of the tenant at a later point in time. The purchase price for the apartment or house is agreed upon when the rental agreement is concluded.

While you already live in the property, you pay rent, which includes a savings amount for the later purchase. When purchasing the property, the amount saved up to that point will be offset against the purchase price. However, the owner keeps part of the monthly payment as rent.

Alternative to credit

Rent to buy is particularly useful if you do not yet have the financial means to immediately fulfill your dream of owning your own home. Because you can usually only get a loan for real estate financing if you already have a certain amount of equity.

However, hire-purchase is only advisable for people who have a high income. Not only do the rent payments have to be borne, the monthly burden due to the savings for the later property purchase should not be underestimated.

Hire purchase or option purchase?

There are two different models for hire purchase - classic hire purchase and option purchase. Regardless of which model you choose - a loan comparison is always recommended in order to find the right loan for your goals.

  1. The classic hire purchase
    With this model, the landlord and tenant contractually determine when and under what conditions the property that was initially rented will finally become the property of the tenant. The purchase price including interest is deferred for the buyer, whereby the tenant settles his debts in the form of monthly rent payments. Either a remaining purchase price is agreed in addition to the rent or the tenant pays the entire amount through the rent. In the latter case, it then takes significantly longer until the tenant is the owner of the property, but there is no additional cost block for the final purchase. The remaining debt can also be settled with a loan if the tenant has not yet saved the amount by the specified time.
  2. The option purchase
    Often cooperatives offer the so-called option purchase. When concluding the rental agreement, the only option here is to purchase the apartment or house. Usually a period of up to 25 years is allowed, after which the property can be bought at a price set today. A certain portion of the rent is then deducted from the purchase price. There is no obligation to buy the property, so the purchase can ultimately be rejected.

These two models differ in that there is no obligation to buy when buying an option. With the classic variant, the tenant has to pay up to 20 percent of the purchase price as a one-off down payment.

This down payment is due before the notarial certification and corresponds to the equity that usually has to be contributed to real estate financing. If the tenant cannot show equity, an installment payment will be agreed. This then ensures that the monthly burden for the tenant increases significantly.

He also has to ensure that after the agreed period the amount for the remaining purchase price is available, as he has entered into a binding contract with the seller. It should also be noted that a one-off acquisition fee is often required.

There is no binding contract when buying options, as the tenant decides for himself whether the purchase is made. The tenant's right of option must be entered in the land register by the owner in order to guarantee him the purchase right within a certain period of time. The rents are comparatively high, as the interest is paid in addition to the repayment.

The high price tries to bind the tenant to the purchase - otherwise the rent paid would be lost. Some cooperatives, such as the Geno Wohnbaugenossenschaft, whose main line of business is the option purchase model, allow a three-month right of termination and repay the tenant with all the savings installments upon termination.

In this way, you can go out of the option purchase without major losses if you do not want to buy the property.

Conclude a lease purchase agreement with a notary

A hire purchase agreement cannot be concluded without a notarial certification. Since this involves the acquisition of real estate, this can only be legally concluded through a notary.

Two contracts are drawn up for hire purchase: a rental agreement and a contract for the acquisition of the property. Both of these contracts must be notarized by a notary. Any agreed down payment must be made prior to this certification if no installment payment is agreed. In particular, if the rent paid is to be offset against the purchase price, a notarial certification is mandatory. Otherwise the entire hire purchase agreement is null and void.

When purchasing options, an entry must also be made in the land register. For this it is also necessary to appoint a notary.

A right of option is entered in the land register in favor of the tenant, which guarantees him the right to purchase the property after a certain period of time (usually 25 to 35 years) at a fixed price.

The entry is made in Section II of the land register. The tenant does not have to exercise this purchase right. If he cancels the rental agreement, the option right automatically expires.

Notarial advice

With both variants, it is absolutely advisable to seek comprehensive advice from a notary. There are many black sheep romping about on the real estate market who want to get rid of properties that are difficult to sell through hire purchase.

The notary should also advise you on the insolvency of the buyer or seller and agree on appropriate arrangements with both parties before the contract is signed. Only by notarising the contracts can it be avoided that the lease purchase contract is void.

Weigh up the advantages and disadvantages

As with all types of financing, the advantages and disadvantages of hire purchase should also be weighed up. We therefore list the pros and cons here for you.

advantages

Rent-to-buy comes with a number of advantages - both for the tenant and for the owner or landlord:

  • The rent is comparatively higher than the regular rent, but the tenant is granted a loan by the seller.
  • Banks are not involved in this type of financing, and no loan has to be taken out.
  • The rental payments made in a specified period of time will be offset against the purchase price, albeit not in full.
  • The beneficial ownership is immediately transferred to the buyer.
  • Financing your own home is possible even with little or no equity.
  • The rates remain stable over the entire period, so that the buyer is independent of interest rate developments.
  • When buying options, the tenant remains flexible and does not enter into any obligations to actually buy the property.
  • The option purchase gives the tenant the opportunity to live in the house for a while before the final purchase, without being tied to it through a purchase.
  • For the landlord, the hire purchase has the advantage that he can achieve higher rents and the money is safe for him even if the contract is broken.

disadvantage

Despite the advantages that are convincing at first glance, there are a few pitfalls associated with hire purchase, which you should find out about in advance:

  • Ultimately, the tenant pays significantly more than if he were to buy the property immediately.
  • The financial conditions are usually worse than with a bank loan, as the rents are above the local comparable rent and there are additional costs such as acquisition fees.
  • Potential buyers must in any case be solvent and have a high income in order to pay the high rents and at the same time be able to save the remaining purchase price.
  • If the seller goes bankrupt, it usually means that the rent paid is lost and a purchase may not materialize.
  • The properties on offer are usually less attractive, as property owners try to get them to buy by renting them out.
  • No state subsidies can be used for hire purchase.
  • Often the tenant has to pay the possibly higher heating energy consumption through the levy. He also has to pay for repairs, repairs and modernizations on the house on a pro rata basis.
  • Since the tenant is not yet legally an owner, he has no say in structural measures that affect the entire property.
  • Hire purchase is only worthwhile if the repayment portion of the rent is more than 80 percent. If the repayment is lower, it is cheaper to continue to rent.
  • If the contract has not been notarized, problems can arise - the contract is then ineffective.

Test funding opportunities!

Before you rush into hire purchase in a hurry to finance your own four walls, you should first check whether financing through a bank makes more sense and is cheaper.

Young families in particular can secure government grants to buy real estate and thus receive discounted loans. A hire purchase is not an optimal solution from a financial point of view.

Legal basis of the hire purchase

The purchase takes place at a predetermined price, taking into account the rents paid up to a specified point in time. The tenancy law therefore applies before the sale, as it is basically an ordinary rental agreement. Only then is it a sales contract, to which the sales law is then applied.

Since when buying options, a term of 25 to 35 years is usually agreed until the tenant is granted the option to purchase, the tenancy law applies here over a longer period of time.

The hire purchase agreement is a mixture of a rental agreement and a purchase agreement that gives the tenant the authority to buy a property within a period of time.

There is no special law that only regulates hire purchase. The implementation and treatment of possible breaches of contract are based exclusively on the provisions of rental and sales law.

Since there is no legal framework for hire purchase, there are many legal gray areas - so check the contract carefully with your notary. You can also contact consumer advice centers to have a hire-purchase offer recalculated.