MyEasySell Advantages and disadvantages of Rent-to-Buy as well as the variants of legal contract relevant to the territories of the former Soviet Union.

In Italy, Spain, other EU countries, in the United States, Rent-to-Buy procedure is quite unified. The development of such relations there is supported by the set legislation, taxation and insurance regimes.

At the territory of the CIS countries and the Russian Federation, in particular, under the conditions of extremely low reliability of insurance payments, absence of collateral mechanisms and insufficiently developed judicial system, the rent mechanism with the right to buy has not yet become widespread.

If your property is located at the territory of the Russian Federation, and you are considering the possibility of entering into the “Rent-to-Buy” relationships as a Buyer or a Seller, please assess the possible benefits and risks based on the following.

“Rent-to-Buy” for the Seller is the ability to sell a property at the price higher than a market price with installment payments. In fact, using this mechanism, the Seller organizes a stable financial flow with the opportunity to get higher interest on equity than banking one.

For the Buyer, the purchase mechanism through “Rent-to-Buy” is an installment purchase without the need of external financing. Despite the Seller’s add-on interest, this option can still be more beneficial than the cost of mortgage lending.

Legally, at the territory of Russia Rent-to-Own deal can be registered as follows:

Mortgage by virtue of the Law (without a bank). In this case, the pledge is registered.
Long-term lease with the right to purchase. In this case, the encumbrance is registered at the Registry Authority by the rent contract.

The difference in these options in terms of risks:

1. Under the mortgage, by virtue of the Law, the apartment is pledged by the Seller until the full payment of the apartment price (conditions, terms, sanctions are set in the contract). Of course, the Seller’s risks remain, but they are secured by a pledge.

The Buyer will get the right of ownership and will live in an apartment without rent but buyout payments. At the same time, the Buyer is obliged to pay utility bills and real estate tax.

2. When registering a long-term rent with the right to buy out, the Seller does not risk anything until the tenant pays the rent, but the Buyer / tenant has a risk, because the apartment is only burdened, but is not pledged.

Rent is the right to possess and to use, and ownership is also the right to dispose. Rent does not limit it, but only burdens. In this connection, it is necessary to take into account the risks of the property division by relatives in case, for example, of the entry into the inheritance. Property might also be arrested in case of the financial penalties arisen by the third parties, etc. In other words, there is a spectrum of possible abuses from the Seller’ side, to avoid those is possible by writing down all possible scenarios and terms in the contract.

It is also necessary to take into account the obligation to pay taxes and utilities, which will remain formally on the Seller, as on the defendant by virtue of the Law in case of a debt.
Do not forget that rental income is subject to income tax, while the buyout (redemption) payments are not. After 3/5 years of owning the property, such payments are not taxable income (applies to a relationship registered as a mortgage agreement).

To summarize, it can be confidently said

that Rent-to-Buy is an excellent tool for both a Seller/ landlord and a Buyer/ tenant. However, you need to be careful when choosing the method of registration of such relations and to use the services of a legal adviser to prepare the appropriate contract in accordance with the Legislation in the jurisdiction of the property location.

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