Bare ownership allows one to receive income by transferring a property, with the amount increasing the older the person is.
Author: Nuria Salobral
Source: Cinco Días

For Spaniards, and especially the elderly, housing is their most significant asset. It is their most valuable possession, the one to leave to heirs, and also the source of income to supplement public pensions and cover long-term care expenses due to increasing life expectancy. Eighty-three percent of those over 65 own their homes, and bare ownership is one option they can use to obtain substantial capital for expenses in the final stage of life. Under this arrangement, the owner can sell their house while continuing to live in it until their death, in exchange for a capital sum that can be received either as a lump sum or as a monthly income while they live.

For the buyer, it is an option to acquire a property at a discount compared to market prices, with a larger discount the younger the owner is. They can buy a cheaper house but won’t be able to use it until the previous owner dies, who will retain the right to use the property for life.

Bare ownership is still a minor real estate transaction, but it is gaining interest, promising to grow as the population ages. Additionally, in a real estate market where prices have risen significantly, bare ownership allows one to buy at a discount, although the waiting period to use the property is indefinite and cannot be specified. Financing such a purchase is not easy. The number of bare ownership transactions is still very low: it did not reach 1,400 in 2022, according to the latest data from the INE, with transactions mainly concentrated in the cities of Madrid and Barcelona, and in the Valencian Community and Andalusia.

More than 80% of those over 65 own their home in Spain

Rising Demand
According to David Paramio, Director of Real Estate Consulting at Tinsa, “in the current economic climate, bare ownership makes sense, with high inflation and an increasingly inverted population pyramid where in old age, it becomes more important due to the need for capital to cover family, care payments, and essentially, living in a more expensive society.” From an investment perspective, the buyer obtains ownership with a significant discount on the market value. Anyone needing a house to live in cannot afford to wait years until the tenant, who has the usufruct of the property, passes away.

The operation seems attractive for both the seller and the investor, though it is much more complex than a standard home sale, making good advice essential. Numerous specialized platforms in real estate operations allow converting property into income and claim to receive numerous information requests.

At Optima Mayores, they state that the demand for information about such real estate transactions increased by 200% last year. Most inquiries, according to its president Ángel Cominges, were about reverse mortgages, an option that generates more interest among the elderly as it allows them to keep the property and leave it to their children, though the children must assume the debt with the bank to recover the house.

The Appeal of Lifetime Monthly Annuities with Rising Interest Rates

In contrast, bare ownership is typically chosen by those without children or who do not wish to leave their home as an inheritance. “The most important thing is to receive good initial advice and conduct a comparative study of the different options to convert property into income,” Cominges explains.

How to Calculate the Value
If choosing bare ownership and assuming loss of property ownership, the key is knowing how much money can be gained from the sale. Calculating this value is not easy. On one hand, there is the market value of the property, as in any sale, for which an independent appraisal is recommended, similar to one used when applying for a mortgage. From that valuation, the value of the lifetime usufruct must be subtracted, determining the discount for the buyer. This means valuing the usage time of the property until the seller’s death. The usufruct value equals the annual rental price of the property multiplied by the seller’s life expectancy. Thus, the younger the seller, the less money they will receive, as they will enjoy the usufruct of their home for more years. “These transactions are usually made from the age of 75 onwards, because there are no investors willing to invest for periods longer than 15 years,” adds Cominges.

For example, a 77-year-old woman selling a property with a market value of 400,000 euros in Madrid or Barcelona could set a bare ownership purchase price at 240,000 euros. Her life expectancy for calculating this value is based on the mortality tables of the Directorate-General for Insurance, used by the insurance sector, a variable some specialized companies also combine with INE mortality statistics.

According to Grupo Retiro, another firm specializing in converting property into income, a house with a market value of 300,000 euros can be sold under the bare ownership model with a 45% discount for the buyer if the owner is 75, and a 25% discount if they are 90.

Tinsa adds that for a property with a market value of 300,000 euros and an average monthly rental price in the area of 1,150 euros, the discount can reach 27% for a tenant life expectancy of six years. The discount may be considerable for the buyer, but it is important to consider that “it is an operation with very low liquidity, difficult to finance, and usually with a longer term than investors initially think,” they point out at Optima Mayores. Thus, banks do not grant mortgages for these types of purchases, in which a tenant continues living in the property.

Tax-Free Sale
Selling bare ownership is tax-free for the elderly as long as it is their habitual residence. After the sale, there is an option to receive the money in a lump sum or as a monthly income while alive. The latter is usually the most common method: the seller receives the money they need each month until they die, without the temptation to spend it on other purposes, and the buyer can more affordably assume the purchase. This monthly payment does not equal a lifetime annuity, the financial product that includes remuneration payments and is becoming more attractive with rising interest rates.

Payment Methods
According to Paula Satrústegui, a partner in wealth advisory at Abante, lifetime annuities were not attractive during the long period of zero interest rates. But now, they are becoming more interesting as an alternative to deposit the money received from the sale of bare ownership since one receives, in addition to the monthly payment, a return. Sellers opting to receive the sale money in monthly payments should consider whether to receive it through a lifetime annuity (with interest included) or as a simple distribution of the bare ownership value based on life expectancy. In the latter case, the payment guarantee will be the sales agreement. If the buyer misses a monthly payment, they lose the bare ownership. According to Abante’s calculations, a 70-year-old man selling the bare ownership of his house for 200,000 euros could receive an annual amount of 10,687.5 euros in a lifetime annuity with a 2.4% annual return, based on current market offers, where the capital is gradually consumed. In the event of death, heirs will receive any unused technical provisions.

Expenses and Commissions
Mar Villa, operations director of Grupo Retiro, explains that the intermediary’s commission for bare ownership is about 3%, in line with other real estate transactions. As for expenses, the tenant and former owner continue paying community fees, while the new owner covers any assessments and municipal taxes. “For the buyer, it can be a low-risk investment but medium- to long-term and with very low liquidity,” they point out at Optima Mayores.