To increase the pension through one’s own real estate without having to sell it completely sounds very tempting, especially for people of advanced age. Through the pension system in Germany, not all needs can be met and so other more lucrative ways must be found to improve the financial situation. These methods differ greatly from each other and bring different advantages and disadvantages. So the decision, for one of the variants should never be taken lightly and better discussed in advance with a knowledgeable contact, such as lawyer Sascha C. Fürstenow, to achieve the maximum profit.
Possibility 1: House sale with right of abode
Those who desire to sell their property, but want to continue living in it for life, could consider selling the house with an unlimited right of residence. The right of residence, is registered in favor of the previous owner, thus granting a right of joint use of the property after it has been sold to a new owner. The beneficiary does not pay rent, as in the case of a normal lease, but bears the ancillary, repair and maintenance costs. Through the sale, the sellers, only take care of the costs that arise from the pure use. This fact represents for many house sellers an important motive, since it becomes with advancing age ever more heavily in the owner position around a real estate to care.
However, in contrast to usufruct, the beneficiary of the right of residence has no claim to rental income or other use of the property, because the right of residence is non-transferable to third parties and expires at the latest upon death. On the other hand, the beneficiary has a say and other rights, such as the right of admission, which allows him to share the premises with his partner or family members.
How is the right of residence granted?
The acquisition of the property is done by agreement and registration. The contract requires notarization, but in most cases this is done together with the conveyance in order to save costs.
The lifelong residential right must be entered in the land register of the property in order to secure the rights. Normally, the responsible notary makes the application at the land registry office with the submission of the owner’s certified declaration of approval. An unlimited residential right would remain in force even in the event of a sale, so that the beneficiary would not lose the residential right even in the event of a resale.
Since the sum is paid immediately in full, this immediately increases the liquidity of the seller and so larger projects can be implemented more quickly than with other alternatives. However, it is important to consider the tax allowance and the wide range of applicable taxes, as these can reduce the profit and another annuity option may be more profitable.
For whom is the sale with life-long right of residence suitable?
It should also be noted that this variant of house annuitization is more suitable for owners who later do not wish to bequeath this property to their family in case of inheritance or do not have heirs. By selling the house, the seller loses all ownership rights and the property changes into the ownership of the buyer, who from then on holds all powers.
A residential right as a limited personal easement, additionally reduces the value of the real estate, since it represents a real burden, which means that one obtains a lower sales price, should the new owner intend to resell the real estate later again. If this intention exists, the buyer is recommended to create a temporary right of residence, because after the expiration of the period one can resell an encumbrance-free property at a higher value.
Option 2: House sale with usufruct
Usufruct is particularly suitable for those who wish to continue to draw benefits from the property after the house sale and do not exclusively intend to remain living there themselves.
A registered usufruct right allows the beneficiary to draw all the benefits from a property. This brings a great advantage over the right of residence. In most cases, the benefits from a usufruct are rental income from subletting. The beneficiary also obtains the usufruct of the accessories located on the land, which, for example, grants him the use of an arbor, or other objects, if the buyer and the seller agree on it.
In case of sale, the previous owner retains the right of usufruct and can stay in the property or move out of the property and sublet it. The usufruct entitles him/her to the rental income and all other benefits of the property.
The costs of extraordinary expenses, for example, the removal of storm damage or storm damage are borne by the owner. The usufructuary, on the other hand, is basically obliged to maintain the property, so the usufructuary bears the maintenance costs. He also bears the costs for gardening, cosmetic repairs and is obliged to take out insurance against fire damage and other accidents at his own expense. He is also obliged to pay the property tax and is responsible for gritting and snow removal. In case of violations, claims for damages can be asserted. This means that there are more obligations for the usufructuary than with a pure residential right. These facts should definitely be weighed up before making a decision.
How is the usufructuary right granted?
The right is created by the agreement of the buyer and seller and the entry in the land register. However, the usufruct cannot be granted to a subjective right in rem, as these are not transferable. The usufruct can only be granted to a part of a land plot, but not to a part of a building. It can also be limited in time or conditional, which must be recorded in the land register.
If a fee has been agreed upon, which is to be paid to the owner on a monthly basis, this must be precisely determined and also entered in the land register; a mere orientation to the rent index is not sufficient in these cases.
A legal obligation arises between the new owner and the usufructuary. The usufructuary acquires a right of use, while the owner retains the right of disposal. The usufructuary may carry out alterations only within the scope of obtaining raw materials, however, these may not change the economic purpose of the object.
The usufruct right, like the personal limited easement, is not transferable or inheritable and expires upon the death of the person. However, the exercise of the usufruct can be left to others, which is another advantage over the pure right of residence and makes this method more attractive for rental cases. With the transfer, for example, the life partners or children of the persons would also be entitled to receive benefits from the property.
Who is the sale with usufruct suitable for?
The model of usufruct is mostly used by older people over the age of 65 who are owners of a property or have almost completely paid it off. They sell their property and receive a usufructuary right to it, through the immediate payment they improve their liquidity and can still use the property for life almost as usual and remain living there.
In case of a resale of the property, the usufruct right remains and has to be deducted from its value. In addition, there are notary fees of approximately 0.4–0.6% of the value of the property for registration in the land register. This further reduces the expected sum. Therefore, usufruct is more advisable in cases where the property is not to be resold and the previous owners intend to use it not only for purely residential purposes but for rental income.
Option 3: Life annuity
The life annuity is a special form of real estate sale. The life annuity model is particularly recommended for people of retirement age and serves to supplement the pension during the remainder of the person’s life. The sellers secure a right to live in the property and receive the purchase price in monthly installments. Only upon the death of the sellers does the property become the property of the buyer.
With increasing age, many of the people are no longer able to maintain their property and take on further obligations, such as renovations and refurbishments. By selling the property to a third party, this obligation can be completely relinquished in the case of a life annuity, without having to move out of the familiar surroundings.
How is the life annuity agreed?
The buyer acquires the property by agreement and registration in the land register. Further a notary must be appointed to certify the sales contract. The requirements to the life annuity differ only in that a life annuity promise in written form must be additionally present.
The right of residence is entered in the land register in favor of the sellers. It can be terminated if this has been effectively agreed. The parties have the option of fixing the installments until a certain date or even extending them until after death. For example, if a couple sells a property, it can be agreed that when one party dies, the other party will continue to receive payments and may remain living in the property until death.
The registration of the right in the land register reduces the value of the property by the amount of the right of residence. However, by registering the reallast in the land register, the case can also be secured that if the debtor of the payment defaults, the sellers can still realize the property. This can be the case with the agreement of a condition precedent, so that in the case of non-payment, the property is again entitled to the original owners and they may dispose of it.
It should be noted for the recipients of the annuity that it is taxable and therefore the annuity may not be received in the expected amount. This fact should also be taken into account when choosing a suitable annuity method.
For whom is the annuity suitable?
The buyer does not pay the value of the real estate immediately and minus the right of residence and pays this sum monthly or even quarterly. This makes the purchase of a property easier, especially for younger people who do not want to take out a loan from the bank. At the same time, the annuity secures the monthly payments to the seller. This method is particularly suitable for older people who do not want to inherit but would like to secure their life partner. However, it should also be noted that this method is not suitable if a higher sum is desired in a one-time payment, as the payments are made in monthly installments.
Option 4: Partial sale
In a partial sale, only a percentage of a property is sold. However, this never exceeds 50 percent. The buyer becomes a silent partner of a part of the real estate. In order to ensure the continued use of the sold part for the previous owner, a usufructuary right is entered in the land register in his favor. The sellers therefore have the option of remaining in the property or renting it out, but pay a monthly fee of approximately three to four percent of the sale value to the new owner.
In addition to the obligations of an owner, the seller bears the maintenance costs for the part already sold, which is an additional expense and must be taken into account.
How is the partial sale carried out?
The sale is carried out by agreement and registration and the notarization, as in the methods of house sale and registration of usufruct in the land register illustrated earlier. However, similar to a house sale with right of abode or usufruct, the money is immediately available to the sellers.
However, this method is bound to requirements, these are not in the law, but are often required in practice. The property offered for partial sale should exceed a sale value of 200,000 euros and the sum intended for immediate payment should exceed 100,000 euros. These requirements make the partial sale of smaller houses used for purely residential purposes more difficult. Further the salesmen would have to be in most cases, in the age of approximately 60 years or older. Because of the relatively high user fees, sellers face the risk that if they are unable to pay, the portion of the property will be foreclosed and can no longer be used. There is also the payment of property tax, since only part of the property is sold, this must continue to be paid, even if only partially by the sellers and at the same time owners of the other part.
For whom is a partial sale suitable?
The fact that the sellers do not have to leave their familiar environment, but can, also makes this method more attractive to people of advanced age, as it leaves open the possibility for them to change location again later or to move to a retirement home. A further advantage is also that a part of the real estate which was not sold can be bequeathed further and over this also alone decided, one can draw however additionally uses from the sold real estate part. Furthermore, if desired, a repurchase can be agreed upon in order to keep open the possibility of owning the complete real estate later and possibly bequeathing it. Particularly tempting is additionally the immediate disbursement of the sum and further additional monthly amounts, which can be obtained by the letting. Thus, even larger wishes can be fulfilled more quickly.
With this method it is to be considered whether the sold part of the real estate is to be used in the future for commercial or for residential purposes, since this information is to be communicated to the land registry. Partial ownership is established if the sold premises are to be used for commercial purposes, while condominium ownership is established if the premises are to be used exclusively for residential purposes. This division would have to take the form of a partition plan and be notified to the land registry. In the event of a subsequent change, notary and land registry costs would be incurred. Additional costs could arise from the incurrence of speculation tax, which is due on private land or house sales.
These points should definitely be included in the decision-making process.
Option 5: The reverse mortgage
With the reverse mortgage, an owner borrows against his or her property, which is free of debt and encumbrances. In return, the owners receive a monthly installment payment. Rarely, they receive their money with a one-time payment from the bank.
The owners retain their rights and continue to live in the property without having to pay a fee for it, as with the partial sale. The difference with a normal mortgage is that the interest and repayment that would otherwise have to be made are deferred, until the death of the borrower. From the time the loan matures, the heirs have the right to decide whether to repay the loan, including interest, or to give the bank ownership of the property. Thus, it can be a difficult decision for the heirs to accept the inheritance if a loan is owed in a large sum, plus interest. Therefore, this variant of house annuitization is usually recommended only if the desire to inherit is not given.
How is a reverse mortgage structured?
In the case of a reverse mortgage, the contract concluded between the bank and the owner is not a purchase contract, but a loan contract. However, the creation of the land charge also requires an agreement and registration. The registration entails high notary fees, which must be observed. In addition, an appraiser must be appointed and the land charge certificate must be handed over. A letter land charge is entered in the land register of the property in favor of the bank to secure the loan, so that the property can be realized after the owner’s death.
The advantage of the reverse mortgage is that the loan is tax-free and thus the payments received are not reduced. It is also advantageous that there are no monthly interest or principal payments to be made. Further, the borrower also does not have to leave the familiar environment, which brings another advantage, because most people, at a certain point in their lives do not want to go through a move.
Disadvantage of the reverse mortgage
A major disadvantage of the reverse mortgage is the low payout that the borrower receives. This results from the bank retaining some of the money because it is unclear how the value of the property will change over time until it can be sold. This usually includes the longer life of the borrower. Also, the lack of repayments and interest reduces the security of the bank and leads to the fact that the payout is again lower. Further, it should also be noted that the property must be maintained during the life of the loan, and at the expense of the owners.
Who is eligible for a reverse mortgage? Would a reverse mortgage be suitable?
Due to the fact that mostly older people have fully paid off a property and it is unencumbered, they more often resort to the reverse mortgage, as they would not receive a normal loan from a bank. This method can be used primarily to bridge short-term periods when more liquidity is wanted and needed, after which it can be paid off again. For example, this can be used to support family members who need immediate assistance. If a lifelong installment payment is desired and the possibility of payment by heirs is unlikely, an annuity is more recommended.
6. summary
The many methods of annuitization bring numerous advantages but also disadvantages, so that the choice of the appropriate method should be made carefully and with a view to the future. Attorney Fürstenow will be happy to advise you on this.
Attorney-at-law Sascha C. Fürstenow will be pleased to advise you on this matter and offers a free and non-binding initial assessment of your facts in advance.
The legal advice was prepared by the employee of FÜRSTENOW Law Office, Ms. Hetman.