Potential Disadvantages
For the option holder:
•You are actually letting a property. You must ensure you will be able to meet the let on time otherwise you will be jeopardising the contract. Bear in mind the currency exchange rate fluctuation if you’re source of income comes from abroad i.e. sterling pounds or dollars against the euro.
•As it’s a let, the rent premium may be revised annually by your landlord in line with inflation. Spanish Tenancy Agreements are normally referred to the Consumer Price Index (IPC in Spanish).
•For very long-term options, exceeding normally 3 years, an additional deposit (option fee) may be requested by the landlord besides the normal 1 or 2 months’ deposit for letting out the property. This may not appeal to everyone of course but it is done as prove of a serious commitment on behalf of the potential buyer.
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The main disadvantage is that these contracts last typically 2-5 years and in the interim the landlord’s financial circumstances may change. i.e. if the property has a mortgage loan taken against it and the landlord defaults, it may lead to a repossession procedure. You would still have a right to let the property if it’s repossessed, as the lender must respect a long term tenant, albeit you may no longer have the option to exercise the purchase of the property in the same conditions as you agreed to initially. You would actually have to raise the funds now and pay off the outstanding mortgage on the property if you wish to buy it off from the bank. Not to mention that if you additionally paid an option fee you would likely forfeit it in the event of a foreclosure.
•Buyers prefer long-term options to build up equity and in the interim keep an eye on where the property market is heading. Short-term options appeal to vendors but on doing they will be reducing the pool of potential buyers as few buyers will be interested. It’s a tug of war on which a consensus, balancing both opposed interests, must be sought.
•Another problem is that you are committing yourself on a pre-agreed price that in a few years time, despite the hefty worded in discount, may still be above the current market price. Obviously it makes no sense to execute the option if you are buying a property above the current market value. It would then be a case of a lost opportunity really as at no time are you forced to buy the property but you will of course forfeit in full the paid rental (opportunity cost) over the years negating the main advantage of following this option.
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