Life annuity

Check Out This Real Estate Deal

The following article is from the new book Uncle John’s Uncanny Bathroom Reader.

(Image credit: Flickr user Ming-yen Hsu)

There’s an old saying that the three rules of real estate are “location, location, location.” In France, there’s a type of real estate transaction where what really matters is “mortality, mortality, mortality.”

BON VIAGER

One problem that confronts cash-strapped senior citizens in many parts of the world is how to access the equity in their homes without having to sell the house and find another place to live. In the United States, so-called reverse mortgages are one solution: seniors receive a lump sum or monthly payments from a lender and continue to live in their homes. Then, after they pass away, the home is sold and the proceeds from the sale are used to repay the loan, along with any accrued interest.

In France, a different system is often used. Homes are sold using a system called en viager, or “for life.” Typically, the buyer pays a lump sum to the seller up front, plus a monthly payment, or “annuity,” until the seller passes away. The seller owns and gets to live in the house until they die, and then when they pass away, the buyer inherits the house. Because many years may pass before the buyer can move in, the buyer purchases the house at a heavily discounted price, called the “occupied value,” which may be as little as 50 percent of market value. Because no lenders are involved, no money is borrowed and no interest is paid.

ON THE HOOK

But there’s a catch: the buyer must continue to pay the monthly annuity to the seller for as long as the seller lives. If the seller drops dead soon after agreeing to the deal, the buyer inherits the property for pennies on the dollar (actually, for cents on the euro). But if the seller lives for many years, the buyer must continue to pay the monthly annuity…even if the total amount paid exceeds the market value of the property. If the buyer ever defaults, they get nothing; the seller keeps the money and the house. The system is designed to give seniors the security of a guaranteed monthly income, while giving younger buyers at least a chance at buying a property for a fraction of its actual value. It’s estimated that as much as 15 percent of all real estate sales in France are transacted using the en viager system.

CAN’T MISS

(Image credit: Google Street View)

Perhaps the most famous example of the en viager system is the deal struck in 1965 between a 47-year-old attorney named André-François Raffray and one of his clients, a 90-year-old woman named Jeanne Calment. Calment owned a large apartment in a beautiful old building in the center of Arles, a city in the south of France. Raffray agreed to pay her 2,500 francs each month (about $500) for the place until she died. The deal apparently did not include a lump sum paid up front.

One of the risks associated with en viager transactions is that the seller can lie about their age or pretend to be sicker than they really are, in order to extract larger monthly payments from a buyer who believes the seller might die at any minute. That was not a problem in this case because Raffray knew his client well….