Life annuity is a specific real estate transaction system that allows a seller (creditor) to transfer their property to a buyer (debtor) in exchange for an initial payment (the bouquet) and a life annuity until their death. This system is based on an aleatory contract in accordance with Article 1964 of the Civil Code.
There are two main types of life annuity: freehold life annuity and occupied life annuity. Each has unique characteristics and advantages.
Freehold Life Annuity
In a freehold life annuity, the owner fully transfers their property to the buyer, who then has the right to occupy or rent it. Unlike an occupied life annuity, the creditor does not have any right of use and habitation (DUH) in this case.
Advantages of Freehold Life Annuity
- For the buyer: the possibility to move into the property immediately or rent it out.
- For the seller: the ability to stay in their home for life in exchange for a bouquet and a monthly annuity, ensuring a steady income until the end of their life.
Occupied Life Annuity
In an occupied life annuity, the seller transfers their property while retaining the right of use and habitation until their death. The buyer will obtain full ownership only upon the seller’s passing.
Advantages of Occupied Life Annuity
The seller can continue living in their home until the end of their life while improving their income through the bouquet and life annuities. Before their passing, the creditor may decide to leave their home. In this case, the annuity increases to compensate for the loss of the right of use and habitation.
Why Choose a Life Annuity Transaction?
For the Seller (Creditor)
A retirement supplement: the life annuity provides the opportunity to increase income and improve quality of life.
Staying at home: the possibility to remain in one’s home with an occupied life annuity.
Tax relief: the bouquet is tax-exempt, and the life annuity benefits from tax reductions based on the seller’s age.
Fewer expenses: in an occupied life annuity, the seller is no longer responsible for property tax or major repairs.
For the Buyer (Debtor)
No bank loan: the annuity serves as a substitute for mortgage repayments.
An ethical investment: the buyer helps improve the seller’s pension.
How Are the Sale Price, Bouquet, and Annuity Calculated?
Property Value Assessment
The property value is estimated by a real estate professional based on market prices and trends. Contact your local Optimhome advisor for an accurate valuation of your house or apartment.
Calculation of the Right of Use and Habitation (DUH)
In an occupied life annuity, a discount is applied based on the seller’s age and life expectancy. Several calculation methods exist:
Rental value of the property: an estimate of the potential rent is made.
Rate of return: based on the property’s rental profitability.
DUH TOLOSA method: an approach incorporating multiple criteria for estimation.
Determination of the Bouquet and Annuity
Once the discounted property value is determined, the remaining amount is split between the bouquet and the life annuity.
The bouquet generally represents 20% to 40% of the market value of the property.
The monthly annuity is calculated based on the remaining capital to be paid.
Risks and Precautions in Life Annuity
Risks for the Buyer
Uncertainty regarding the annuity duration: the buyer cannot predict how long they will pay the annuity.
Long-term financial commitment: the annuity payments must continue until the seller’s death, potentially leading to higher-than-expected costs.
Risks for the Seller
Buyer’s solvency: if the debtor stops paying the annuity, legal action may be required. However, a termination clause is included for this purpose.
Precautions to Take
Carefully choosing the buyer before committing: it is advisable to verify the debtor’s financial capacity.
Seeking advice from a life annuity expert.
Reviewing guarantees: insurance options are available to secure annuity payments.
Conclusion
Life annuity, whether freehold or occupied, is an interesting alternative to traditional property sales. It offers an additional source of income for seniors, allowing them to remain at home, and represents a long-term investment option for buyers.
Key Takeaways:
Freehold life annuity allows the buyer to immediately occupy the property.
Occupied life annuity involves a discount on the property’s market value due to the seller’s continued occupancy.
Payments occur in two phases: the bouquet followed by life annuities.
Precautions should be taken to secure the transaction.
Are you interested in investing in life annuity real estate? Consult an Optimhome real estate advisor for guidance and support in your project.
FAQ: Life Annuity Explained
What can be sold or bought in life annuity?
Anything with a definite value can be sold in life annuity (immediate or deferred possession). This includes jewelry, artwork, boats, cars, money, and, of course, apartments, houses, buildings, land, luxury properties, etc.
Who is this type of transaction for?
Sellers looking to improve their retirement income or benefit from their assets in their lifetime.
Buyers who wish to invest/save for retirement or acquire real estate securely for the future.
What is the “bouquet”?
The bouquet is the lump sum paid upfront. It is complemented by a monthly or quarterly life annuity. Its payment is made in advance.
Can the buyer resell the property acquired in life annuity?
Yes, absolutely, and at any time. The new buyer will take over the contract (payment of life annuities or installments). They will compensate the original buyer with a mutually agreed sum without involving the sellers.
Who can provide me with more information?
Your notary and/or a real estate advisor specializing in life annuity. Establishing the financial and legal terms of a sale contract is not easy. Only a true life annuity professional can help you while assuming professional responsibility.
Author:
Audrey Bernard – Head of New Build and Life Annuity Sector
As a specialist in life annuities, I put my expertise at your service to guide and advise you in the successful completion of your real estate projects.
