Buy a house linked to life annuity (Viager in french)

Real Estate
1

Hi!

A friend contacted me about a house to sell with a viager.
I did not find a proper english translation for viager, but as a quick definition basically you buy the house at a discount, but you have to let the seller live freely in the house until he dies, or variant two, you have to send the seller a given amount of money monthly until he dies but you can use the house directly.

My first reaction was “no way, too risky, and I don’t want to bet on the hope of him dying”.
Then I started to simulate the numbers and found that it would be a return on equity of ~8% before his death, and ~14% afterwards. As I would be quite happy with 8% already, it’s worth considering.

The main issue seems to be the additional risks and therefore the debt acquisition. Most bank just won’t consider lending money to buy a viager. From what I understand, since the seller keeps an interest in the house until he dies, even if the buyer goes bankrupt, the bank is not able to recover the loss by selling the house, so they don’t consider the house as collateral.

I suppose the options would be:
1: Put some additional collateral, stock or house. (I don’t have this option)
2: Buy without leverage (Brings down the returns to ~3.6%), would need more people to chip in
3: Find financing other than mortgage, not sure what is possible there.

Any experience or feedback about buying with viager?

2

How do you get any return before his death? Wouldn’t it be the opposite, you’ll pay and get costs with no revenue so negative returns.

3

The property consists of multiple rentals. Rental income is greater than the annuity we would have to pay him.

(I suppose this implies that it may financially better for the seller to keep the house, we’ve been told he had to much debt and had to sell, not sure about this as rental income more than covers any recent mortgage conditions. Maybe he just wants to reduce risk or hassle with tenants?)

4

If he’s old, he might not be able to get a mortgage. But in this case, I’d advise you get from him extracts from his bank accounts showing the rent money being paid in.

If the house is in France, be especially wary. I know people who had very knowledgeable non-paying renters who used the court system to stay in the house for years without paying rent and then only left when the owner paid them to leave…

2 Likes
5

Wait? What? The 8% was leveraged return?!

Are you for real? I wouldn’t buy a normal property with less than 5% un-leveraged return, let alone a viager! Forget about it and move on! This is not the deal you think it is.

If you have money burning a hole in your pocket, I have a single family home in Kt. Zurich that I can sell you for <1m with a higher rental yield.

3 Likes
6

I wonder what unleveraged return is once the viager expires?

7

Residual values far in the future are worth surprisingly little when you discount them back, so I’d expect it to be more or less the same.

8

Unleveraged return once the viager expires is ~5.3% with the same calculation (more on that below)
He’s ~80 years old, but I suppose in good shape if he wants annuity and not equity.

That’s all without any negotiation, so I suppose it could change favorably.

Also I don’t have much experience comparing rental properties : )
For example, here I’ve used 1% of annual maintenance cost based on the self declared value of the house (without the viager discount).
And I’ve considered the purchasing cost (5% for the lawyer).

If we set both to 0, it bring the unleveraged return to 5.19%, and leveraged to 15%.

9

I’d estimate after taxes, you’re looking at an IRR of around 3-4%.

1 Like
10

Just in case BCGE offer mortgage 80% on “Viager”

https://www.bcge.ch/en/pret-hypothecaire-acquisition-viager
If there is existing debt, the current bank might be ok if you take the mortgage yourself

I have some experience with that. Could be a good solution if you’re really confident about house location and want to avoid renting hassle.
This kind of stuff could be win-win

1 Like
11

These viager offers are a plea for people looking for housing to live in. In high demand area like Leman lake side or Zurich, you always get results and alerts for decent house at a price you would be willing to pay, just to figure out in the description that it’s a Viager. This should be banned from listing or available only with a special option

And even if someone like you would be interested, I still don’t get it how you could make money out of it, you just block capital, pay for everything to maintain and the taxes and just hope for the seller to die sooner than later. It’s basically private insurance business, I would not touch it unless I have really a lot of money to spend and want to secure hard to find property for the future in the hope to refurbish them and sell them much higher or sell the land much higher or make several housing on what was one previously.

In any case it’s not a healthy situation for the market and people who want to buy to live in and not to try to avoid inflation impact.

12

What is the discount versus market price of the property ?

Let`s say property is worth X
you get it for Y
Y is less than X
D = X - Y

If you would buy it at normal price, you would be able to rent it out and get income, let`s say post tax annual income of Z (after covering all costs)

So, just to understand the math. Two options are

Option 1 -: Buy a rental property for X and rent it out to earn Z per annum
Option 2 -: Buy a rental property for Y and get zero rent.

So you should do the calculations and see if D is worth the while for a 20-25 year period. This is easier for insurance companies because they can spread the risk over many people. Here you are relying on one person, so you need to evaluate longer term scenarios.

How much is the discount? Are we talking about 30-40% or sub 10%?

13

or be friends with a hitman :stuck_out_tongue:

1 Like
14

Typical discount rate is 4% per year of life expectation

If the seller go to retirement house depending on the contract you are not the owner but can occupy it or starting to renovate the property.

Mortgage interest is tax deductible.
If the house is a unique area and you can negotiate a good price the option should be considered. Typical down paiement is like 12% the value of the house (20% of 60%) and no need for amortization

15

Viager is a bet with strong concentrated risks. You are betting against the actuarial table statistics on 1 individual on 1 RE property.
You could find out the occupier will beat life expectancy and major issue on the property that will need structural work.

16

Indeed a property can get badly trashed over the remaining life period.