Going Halfsies: The Risks and Pitfalls of a Partial Home Sale in Retirement
Earning an Income from Home: The Potential Pitfalls of Partial Selling
Retirement planning can be a bit of a headache. Dreams of traveling the world, updating the home, or simply enjoying life's little luxuries can seem out of reach, especially when the majority of your funds are tied up in real estate. But what if there was a solution that allowed you to access cash while still keeping a piece of the property pie? Enter partial home sales.
Partial home sales, also known as co-ownership structures, allow homeowners to sell a portion of their home while still living there. Companies like Wertfaktor, Engel & Voelkers, Heimkapital, and even Deutsche Teilkauf specialize in these transactions. Sounds too good to be true? Not so fast.
"These deals can seem like a dream for homeowners in need of quick cash, but it's often the buyer who gains the most," warns Thomas Mai, a financial advisor at the Bremen Consumer Center. Here's why:
Watch Out for Those Use Fees
"A partial sale seems to open the door to having your own home and a decent-sized bank account," says Beate Heilmann, a lawyer and chairman of the working group on rental and property law at the German Bar Association (DAV). But there's a catch, and it's a pretty big one.
Once you sell a portion of your home, you no longer have full ownership. Instead, you're granted a usufruct right, which means you can continue to live in the property, but monthly usage fees for the sold part must be paid. These fees can range from 4.5% to over 6% of the value of the sold part per year, according to Dirk Eilinghoff, a real estate and interest rate expert at the money advisor "Finanztip."
For example, if you receive a payout of €200,000, you'll need to set aside €833 per month just for the usage fee. And don't forget about the property taxes and maintenance costs, which you'll now be responsible for in full.
The Buyback Bummer
In many cases, the company purchasing your share will allow you to buy back that share later. However, the buyback process can be expensive.
"You'll have to pay at least the original purchase price plus purchase ancillary costs," warns Thomas Mai. To add insult to injury, they'll also demand a surcharge for any increase in value, and in some cases, these financial firms even insure themselves against a decrease in the property value.
Nowhere to Run, No Place to Hide
One of the biggest criticisms of these partial sale agreements is a lack of transparency in the contracts and insufficient information provided to the buyers. "The contracts are lengthy and complicated, making it difficult for consumers to get a clear understanding of the total costs," says Thomas Mai.
Moreover, many sellers may not be aware of the potential risks involved. For instance, if the usage fee can't be paid, the house may be sold, forcing you to find a new place to live. In extreme cases, the buyer's insolvency could lead to the sale or forced auction of the property.
Weighing Your Options
Before diving headfirst into a risky and expensive part-purchase agreement, it's essential to explore other alternatives. "Many older customers think they can't get a loan from the bank," says Dirk Eilinghoff. "But they should definitely try."
Consider using your property as collateral for a loan. The cash can then be used for any purpose, including updating your own home or even indulging in a dream vacation.
Another option is renting out your home. As the owner, you decide the selling price, and the costs, such as rent and operating costs, will be much more transparent than with a partial sale.
Before making any decisions, consult a financial advisor and be sure to understand the potential risks involved.
"Consulting a financial advisor could be crucial when considering another source of income, such as vocational training opportunities or investments in personal-finance areas like real-estate. For instance, vocational training programs like Wertfaktor, Engel & Voelkers, Heimkapital, and Deutsche Teilkauf specialize in various fields, offering an avenue for personal growth and potential financial gain."
"When weighing the options for accessing some cash while maintaining homeownership, it's essential to be vigilant about the terms and fees involved in partial home sales. Remaining aware of costs like usage fees, buyback charges, and potential risks of insufficient transparency and buyer insolvency can help in making informed decisions and avoiding costly mistakes in your retirement plan."
