WITH all the madness and mayhem going on in the UK regarding Brexit, and the fact that we are all just trying to get back into normal work mode after the heat and busy period of the summer months, I thought it would be best to focus my column this week on a topic I was asked about recently – ‘Bare Ownership’.
I have to admit that although I had heard of it, I really didn’t know the full legalities, so I thought I would put the question to Javier Cases of Cases and Associates.
According to Javier Cases ‘bare ownership’ or ‘usufructo’ is a form of equity release of selling the ‘bare property’ of your home, whilst retaining the lifetime right of use, or usufruct, to stay living in your home until you die.
Apparently this is proving an increasingly popular alternative amongst the elderly who seek financial solvency or a supplement for their retirement.
This of course has to be a good investment opportunity for the buyer which would clearly be more attractive if you’re 70-plus rather than 60-plus, so you need to be realistic.
For older people with no heirs or who need extra income to improve their quality of life it appears an interesting solution.
However the owners have to agree an attractive rate for the buyer – up to 50% of the value of the property at the market rate, dependant upon the age and health of the owner.
The price can be received in one single payment or in monthly instalments.
In the UK the market value is easier to gauge, but in Spain valuations can vary substantially in any direction.
My recommendation would be to get a trusted estate agent to give you a modest valuation, or maybe three for comparison, and take the middle ground.
You should also do your own market research on the web.
From the legal point of view, it is a special real estate operation, where both parties, seller and buyer, have to have the maximum guarantees and be duly advised by a lawyer.
As for the price of the home (without the usufruct), its value is determined by the market price of the home and the age of the future usufructuary (seller) and their life expectancy.
The longer the life expectancy, the larger the discount will be and vice versa, since it is necessary to deduct the benefit that the buyer does not obtain from the house, as it cannot be used or exploited in lease until the death of the usufructuary.
The rights and duties to be taken into account by each party are:
• Buyer or investor:
– You are obliged to take care of the extraordinary community expenses
of the property, the IBI (Real Estate Tax) and the insurance of the property, as well as the majority of expenses associated with the purchase.
– If the transfer of the property is made in exchange for the payment of a monthly rent, they are obliged to pay this income through a Resolutory Condition, for which they would lose the property in favour of the usufructuary if they failed to comply with the payment.
– When the right of usufruct ends, that is, upon the death of an elderly person, the buyer receives full ownership of the property.
• Usufructuary or seller:
– You have to pay any ordinary community expenses, and supplies (electricity, water, telephone, gas …)
-If it were the usual home, you would not pay capital gains.
– You can make any kind of redecoration work in the house as long as it does not
involve a change in the structure of the property.
– If at any given time, it is not desired to continue making use of the house, the usufructuary can sell the usufruct to the buyer or rent the house and obtain the full rent.
• Advantages for the seller:
– It’s a great way for an owner to have a lump sum in cash rather than sitting on a big asset (we would recommend a chat with the family first !!).
– The owner can remain in their home for the rest of their lives, and leave the remaining agreed percentage to their family.
– The owner can use the equity right now and perhaps gift it to an heir to pay for a wedding /college education etc.
– The owners usufructo or the ‘right to live in the property’ has a real calculable value. They can cash in early and sell it or even renegotiate with the investor to sell it early to the investors.
• Advantages for investors (buyers):
– For the buyer or investor, the purchase of the bare property implies the
acquisition of a real estate asset for a price lower than its market value, up to a 50% reduction.
– An investor only cashes in when the owner passes away.
– It can be a very long term risk if the owner is healthy and in their 70s.
– The original owner is still responsible for the upkeep of the property
– Negotiating can be difficult, although not impossible.
– A bare ownership deal is not as attractive to an estate agent, preferring a clean purchase.
If you are interested in bare ownership please don’t hesitate to contact me on [email protected], the Buyer’s Agent Specialist