Investing in Bare ownership in Spain.
Spanish Solutions have been speaking to some interested parties about Bare Ownership in Spain and how property owners here can get this form of equity release in Spain.
- What about the other side of the deal- The investors?
- Are you looking to invest in Spain and do good at the same time?
- Maybe now is the time to loan money to homeowners and help them release equity?
Home Reversion as it’s also called in Ireland and the UK is becoming a big business in Spain.
Many clients, every single day ask us about forms of equity release in Spain. A big thing amongst the Spanish now is nuda propiedad, or naked ownership. (we call it bare ownership here in the UK they call it Home Reversion).
Spanish Solutions spoke to Pedro and Lourdes in Molina Solicitors to arrange the legalities of these deals. While meeting with the local La Zenia notary we discovered a few more benefits to property owners who wish to free up some cash from their Spanish property investments:
We’ve written about it extensively but the summary for the owner is this:
- It is different (in our opinion, much better) than lifetime mortgage. *
- Property owners can exchange the ownership of their Spanish property for a lump sum of cash or a monthly payment or a combination of both.
- The seller has the right to live in the house for the rest of their life, rent-free subject to adherence of the lenders terms and conditions.
- In the UK it is often called Lifetime Lease / Home reversion. In Spain, it appears to be much more safe than in the UK for the homeowner, but still requires expert legal advice.
- Applicants must be 60 years old or more, however investors prefer clients who are even older. (the very clients banks do not want to loan money to)
- The cash that is released is suitable to major tax breaks and in many cases, sellers pay little or indeed zero tax. If you bought the house for 70,000 ten years ago and it’s now worth 120,000 but you sell the bare ownership for 70,000 you are not subject to CGT.
- Deals can be reached with investors who as well as investing a certain sum, will also accept all the sellers costs.
- The seller pays no monthly amount as there is nothing to repay!
- The Usufructo is an entity in itself and can be resold (subject to strict conditions) with the new owners permission.
- The deal can be negotiated at the ex owner (tenants benefit) but the new owner cannot force the tenant out of the house or cannot change the terms and conditions negatively.
- The older you are the better!
- Generally the owner will receive more money than they would with a lifetime mortgage. (we really don’t like lifetime mortgages due to the horror stories we´ve seen /heard in our La Zenia office).
- The home will not be subject to inheritance tax, as it is removed for the owner ́s portfolio or asset list.
- You can speak to the heirs in advance, explain the ramifications and the loved ones of the owner can get a lump sum long before the death of a parent.
*Spanish Solutions had a client who borrowed 40% of the value of their home and were forced to leave the property due to the hidden dangers on the mortgage just three years later, effectively leaving 60% of the value of the home behind them.
Please take independent financial advice.
However, it’s not all that simple:
Here are some negatives to Bare Ownership:
- If you sell 100% of your Spanish property, that’s it. There is no property to leave to your beneficiaries.
- We think you should tell your heirs of your intentions in advance so that they are aware. They don’t want any shocks after your death. Perhaps family members will be upset at the plans.
- Although unlikely, you could die shortly after taking out the Spanish home reversion scheme, thus the investor benefits greatly from your death.Once you sell the home, there is no going back. You can’t change your mind if your financial situation changes without buying the property back from the investor, almost certainly at a much higher price that what you paid for it.
- You must be at least 60, ideally 65 or over.
- Finding an investor can be difficult and perhaps they will offer less than the asking price. You need to get a valuation (Spanish Solutions will do this for you) and the investor needs to accept it.
Investors in Bare Ownership
What are the advantages and disadvantages of buying a lifetime lease property in Spain?
Some Pros and Cons.
This legal and fully above board scheme allows property investors to acquire full 100% title and ownership of certain Spanish properties for a fraction of the real value. Typically investors pay 60% of the valuation of the home.
The owner may pass away the very next day. However, they can live to be 100 too.
If the investor sells the house in the future to third party, they must sell it with the Usufructo or sitting tenants rights honoured. We will not allow anything else to happen unless with full agreement with buyer and seller.
It can be complicated.
Spanish property buyers interested in Golden visas can take advantage of the scheme. (please talk to a qualified lawyer in Spain in advance).
You will need to hire the services of a good legal company such as Spanish Solutions. Not all legal firms can do the conveyancing in such a way that protects buyers and sellers of the property.
You pay estate agency fees which in Spain, can be high.
Syndicated Capital. It’s possible to pool your money with other investors and use leverage to buy multiple units or a full portfolio of Spanish property. This diversifies your investment across 10 or more properties.
Con; perhaps it is not possible to offload just one of the properties in a portfolio – all properties may need to be sold at the same time.
Let’s assume a syndicat buys 10 Spanish homes on bare ownership in this simple example. Being conservative, allow just 3% appreciation on Spanish homes over the next 15 years and the investment looks like this:
Purchase of 10 x 400,000 euro homes
Average age 68 (statistically 15 years until full ownership)
Cost 240,000 x 10 = 2,400,000 euro investment.
1,700,000 loan to be repaid.
Cash required 700,000 euro.
At 3% appreciation = value in 15 years 5,370,000
Less original investment: cash 700k plus 1,700,000 loan =2,400,000
Profit; just under 3,000,000 euro (before tax) in 15 years.
As we always stress to our clients, the author is NOT a financial advisor, financial planner or account. Please seek qualified advice to clarify tax implications, potential profit and risk. The information is given here as an example, in good faith and is accurate to the best of our knowledge.
Private investors buying Lifetime lease properties in spain:
The returns too can be eye watering for the private investor.
You can buy a property currently worth 400,000 in Alicante for the discounted price of 240,000 (60%) of the value.
The owner lives for ten more years. Let’s assume there is appreciation on the property of 5% per year for the next 10 years. This appreciation while no means certain is possible and is based on the property value of 400,000, not the 240,000 euro the investor has paid.
The property will in ten years be worth 650,000 euro – a gross profit in excess of 400,000 euro.
Negatives; the Capital Gains tax can in this case be as high as 80,000 euro.
(these are rough calculations, please speak to our accountant, Mari-Carmen Poveda for more exact information).
Banks are lending for Bare Ownership in Spain. You don’t necessarily need to use your own cash to buy one of these properties. Banks in Spain are currently lending for such opportunities. In the above example, you may be able to borrow 168,000 euro. The bank can’t lose- they hold the deeds to property worth 400,000 with just a loan which is way less than half the real value even in a fire sale.
Negative: Bank mortgages in Spain can be expensive and you will need to match the normal lending criteria.
Lifetime lease cannot generally be used for commercial property, (unless with a separate contract not related to the tenants death) with an exact time frame for when they will pass the property back to the owner.
This is not a lifetime mortgage, whereby the owner will continue to own 100% of their Spanish home. This must be made clear to owners.
Your lawyer must be very certain that there are no debts on the property, no remortgaging has taken place and the seller is the actual owner.
There is no risk of the tenant not paying their “rent” as in fact, no requirement exists on the tenant to make regular monthly repayments. They are liable however to maintain the property during their lifetime or until they permanently leave the property.
You are helping someone to live in their home until the time of their death, while releasing equity now, when they can still take advantage of it. The disadvantage here is the owner cannot leave the asset (the Usufructo, right to live in the property) to anyone else after their death.
Depending on the deal you negotiate with the owners, you may need to pay their costs, notary fees, mortgage arrangement fees, Spanish equivalent of stamp duty etc.
Investors can negotiate with the sellers. Let’s say you don’t love the property- Its an average property on an average street, no upgrades done, not particularly good views. The owner values the home at 100,000 but will sell bare ownership for 60,000. She is 65 years old in very good health. You may offer her 50,000 euro for example. It is a free market, but once you make an offer and the owner accepts we expect you to honour the agreement.
The ex-owner, now tenant of the property, is liable to keep it upgraded. You are relying on them to keep up repairs, pay community fees etc. A tight contract is important to make this clear and ensure no confusion as to who is responsible for what.
You cannot live in the property while the Usufructo owner is still living there. Spanish Solutions will arrange yearly viewings of the property so you can see that they are maintaining the condition of the property. Surprise visits are not acceptable.
If you borrow in Spain, you can make your repayments here too, leaving you less exposed to a fluctuating currency. In you invest with a foreign currency however, by the time you go to sell the property, the euro may have devalued against the pound/kroner/dollars.
Not all owners want others to know that their property is available for sale on a bare ownership plan, so finding such properties can be difficult. Spanish Solutions have a portfolio of such sellers who are willing to listen to offers. We may need you to sign an NDA before we can release details of these properties and in some cases you may need to prove proof of funds before speaking to the agents/owners.
Spanish Solutions insist on speaking to the heirs of the property to explain what will happen after the tenants time has passed. They may object, and restrict the owner from selling you the investment. When they discover that their parents no longer own the house, they may be upset. On the death of the Usufructo owner, the family may be expecting a lump sum, had we not contacted them in advance of signing the deal. We think this communication is fair for everyone as people do not like surprises, especially when they are dealing with grief. However we cannot make an owner do something they do not want to.
This is an excellent long term investment. You can invest in the property belonging to a 68 year old person and expect to take possession in 15 years. However, due to the healthy way of life here in Spain (according to the WHO, the third highest in the World) life expectancy in 2018 was Male 80.3, female 85.7, that means a total life expectancy in Spain is 83 years.
To sum up, investing in bare ownership in Spain can be a very good long term investment. Be careful, this is not for every owner/buyer. Finding the properties can be difficult, the legalities can be complicated but the profits can be substantial.
If you’d like to discuss it more with us, we ́re always delighted to help.