Buying home on annuity: Everything you need to know

Buying on annuity is an alternative way of buying and selling real estate. What is it right? What types exist? What is the progression? Find out here!

Contents

• What is “buying on annuity”?
• Types of buying on annuity
  • Free annuity (rente viagère libre).
  • Occupied annuity (rente viagère occupée).
  • Annuity with temporary right of residence
• What should you consider before you buy on annuities?
• Advantages of buying on annuity
• Disadvantages of buying on annuity
• The course of an annuity agreement (6 steps)

What is “buying on annuity”?

• In buying on annuity, the buyer buys a property from the seller, where payment is not made all at once, but in the form of periodic payments (= the annuity) to the seller.
• Typically, people combine the annuity installment with an initial lump sum payment called a “bouquet.”
• The seller usually continues to live in the property for a predetermined period of time or for life.
• In addition to paying for the annuity and any bouquet, you also pay registration fees when you sign the notarial deed. The signing occurs when the contract is recorded, not when the seller dies.

Types of buying on annuity

Free annuity (rente viagère libre).

• The seller sells the property and leaves it immediately.
• The buyer immediately occupies or rents the property.
• The buyer pays a periodic annuity to the seller until the seller’s death.

Occupied annuity (rente viagère occupée).

• The seller sells the home, but continues to live in it for life.
• The buyer takes possession of the property only after the seller’s death.
• The buyer pays a lower annuity because the seller retains the right of residence.

Annuity with temporary right of residence

• The seller continues to live in the property for a specified, agreed-upon period of time.
• After this period, the buyer occupies the property.

What should you consider before you buy on annuities?

• The age and health of the seller. The annuity is calculated based on the life expectancy of the seller. The older the seller, the higher the annuity usually is.
• Property value. Estimate market value of property to determine a fair annuity.
• The duration of the installment: Sometimes puts a maximum duration on the installment of the annuity. This duration depends on the seller. For example, it can mean 15, 20 or even 25 years.
• The amount of the bouquet. Consider the amount of the first lump sum payment. If you pay a higher bouquet, the annuity is often lower.
• Contract terms. Make sure the contract is clear and detailed. Make clear agreements about payment terms, maintenance of the property and what happens in the event of the seller’s or buyer’s untimely death.
• The tax aspect. Annuity income may be taxed as retirement income. Get tax advice from your accountant.

Advantages of buying on annuity

• The seller has financial security. He/she receives a fixed monthly income, potentially contributing to a more comfortable old age.
• With an occupied annuity, the seller continues to live in the home for life, providing security of housing.
• The buyer pays lower initial costs (bouquet) compared to a regular home purchase. So you need less equity. In some cases, you don’t even need a mortgage loan.
• In addition, the buyer usually pays a maximum total of 75% of the home’s market value.
• The buyer may enjoy a capital gain on the home. If the seller has a long life, the total purchase price is sometimes less than the final market value of the home.

Disadvantages of buying on annuity

The buyer and seller determine the value of the home in advance.

• Does the property become worth more? Then the seller cannot suddenly ask for a much higher price. However, the annuity may be indexed provided you include this in the contract.
• Does the seller live significantly longer than initially expected? If so, it could be quite costly to the buyer.
• As long as the seller continues to live, you should continue to pay as a buyer. Even if you are in financially difficult situations.

The course of an annuity agreement

Step 1: Determine the value of the property

• A licensed real estate expert inspects the property for EPC, maintenance, location, amenities and needed renovations.
• Then this expert determines the value of the property. He/she provides you with a report, with an objective valuation that forms the basis for negotiations.

Step 2: Calculate the annuity

• The same or different expert determines the annuity based on the estimated value of the home, the age and age expectation of the seller and the type of contract.

Step 3: Negotiate terms and draft the contract

• Discuss and negotiate the terms with the seller and draft a watertight contract with the help of a notary.
• Determine:
  • The bouquet.
  • Annuity payments.
  • Length of installment payments.
  • The rights and maintenance obligations of the buyer and seller.

Step 4: Register the contract

• Make the agreement official with a notary public. Sign the contract. He/she will ensure that the contract is properly recorded.
• Upon signing, the buyer (unless otherwise agreed) pays the registration fees and notary fees.

Step 5: Pay or in periodic payments

• After signing the notarized deed, the buyer must make annuity payments according to the contract terms.

Step 6: The seller dies

The last step of buying on annuity, is that the seller dies. In this process, the following happens:

• Periodic payments end automatically.
• Any outstanding payments expire and the buyer is the final owner of the property with no further financial obligations.

Sources: Time, Wikifin, Zimmo

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