Frankfurt “Your house is now fulfilling dreams” is an advertising slogan in the industry. A whole range of providers of annuity and part-sale products are currently intensively courting older owners in particular to consider selling a share of the building. The rising prices of houses and apartments make such a move interesting on paper.
The idea behind it: owners give up the property in whole or in part in old age and receive money and a lifelong right of residence in return. At the same time, the seller has an option to buy back the part sold.
But the model is controversial. Consumer advocates warn against such offers; these are not only unprofitable, but also dangerous. Industry representatives, on the other hand, feel that they are wrongly being pilloried.
So how attractive is such a partial sale? What are the arguments for and against? The Handelsblatt has invited the head of Deutsche Teilkauf, Marvin Kirchhoff, and the real estate economist Steffen Sebastian to a controversial debate.
Mr. Sebastian, for many Germans owning their own property is an important factor in their retirement provision. So is it a good idea to use part of it to supplement your pension?
Sebastian: It is not unproblematic to invest your savings primarily in real estate. If I need money, I can’t just sell the bathroom quickly. I don’t want to fundamentally deny the justification for the partial sale model, but in my opinion it has a lot of disadvantages.
Mr. Kirchhoff, you shouldn’t be hearing this for the first time. Do companies that offer partial sales sometimes take advantage of the ignorance of some older property owners?
Kirchhoff: no way. Our customers deal with the topic for months: they are anything but ignorant. We believe that there is a large market for our offer. In Germany there are 13.5 million homeowners who are older than 60 years. Not all of them are doing well. Half of them have no decent income despite owning a property. A partial sale offers them the opportunity to stay in the house and still fulfill one or the other wish.
Anyone agreeing to a partial sale pays a monthly usage fee for the sold part of the property, which is 2.9 percent in your case. Why is this more attractive than a loan with a lower interest rate?
Kirchhoff: That’s not true in general. You may get a cheap loan, but things look different as you get older. The Residential Real Estate Credit Directive, which has been in force since 2016, has tightened the criteria again. With increasing age, you often have to set the repayment significantly higher against this background – and then the loan can become more expensive.
Sebastian: Well, I have to intervene now: It’s true that the conditions are worse in old age – but then it’s not that difficult. There are now loans that are specially tailored to this target group. Banks are increasingly discovering this clientele. Nobody has to die out of debt either, that’s nowhere in the guideline. It’s not that the loan per se isn’t an alternative.
Let’s talk about the running costs for maintenance and renovation. Do you also participate in these sums as a co-owner?
Kirchhoff: No, that’s one of the criticisms of the model – and we understand it. But that can hardly be changed. With us, the owner retains the authority to make decisions about the property, but then he also has to pay for the costs – as before.
Sebastian: That’s a problem, but I don’t know what the alternative should be either. If you were to have a say in the new faucet in every house, the partial buyers would have to make complex calculations about the technical condition of the house – the costs of which, in turn, would be felt by the previous owners.
Vita Kirchhoff and Sebastian
Let’s look at the distribution of risk in the partial sale model. The Bundesbank and the ECB are warning of the market overheating. Does the seller always have to deliver your financial share in a sale?
Kirchhoff: We understandably want to get back the money we put in – plus a 17 percent fee like everyone in our market. So in the case of a sale, we always get 117 percent of the amount that we paid out. However, if a significantly higher increase in value is achieved during the sale, the partial seller even benefits from a bonus with us. On the other hand, if the increase in value does not occur, it would be to the detriment of the partial seller. That’s why we only buy properties whose potential for value appreciation convinces us.
Sebastian: Do you also insist on the 17 percent if I change my mind after two years and want to sell my property?
Kirchhoff: Yes, but with such a short holding period, it might have been the wrong model for the seller. In normal times, residential real estate in Germany increases in value by an average of 2.3 percent annually. Boom phases like the one we are currently experiencing are not even taken into account in this analysis. This means that after about eight years the increase in value should be so high that the seller always makes a profit.
Sebastian: But that puts the advantages and the flexibility of the seller into perspective enormously. If you commit to a minimum increase in value of 17 percent, the part seller’s right to sell at any time is largely irrelevant.
Kirchhoff: No, we assume that the purchase prices will develop positively and rely on extensive location scoring. It is therefore possible that the increase in value is already achieved after two or three years.
Sebastian: Well, that’s a huge snag nonetheless. An advantage of a partial sale could be that I protect myself against the risk of a possible depreciation. But you shift the risk solely to the seller. One has to ask oneself: What does that mean then? If I continue to bear the risk of the loss in value alone, then I can simply take out a loan. 17 percent increase in value in an already tight market…
Kirchhoff: It’s about 17 percent on the payout amount, that should be said for the sake of order.
Sebastian: I hadn’t noticed this before when reviewing their extensive documentation on the website. But it has to be said very clearly: This is a one-sided distribution of risk. You are guaranteed a gross return of 2.9 percent per annum, you have no cost risk in terms of maintenance and you have no risk of appreciation. That’s a very nice risk-free return for you.
Marian Kirchhoff has been in charge of customer business since Deutsche Teilkauf was founded in 2020.
(Photo: German part purchase)
Kirchhoff: Our customers also benefit from it. Our model gives you a lot of flexibility and great decision-making authority. They participate in increases in value and can, if they wish, buy back their real estate share at any time. And of course they can stay in the property for as long as they want.
Sebastian: Yes, but then I might as well get a loan. Why do I need you as a property owner at all?
Kirchhoff: With us you have a certain flexibility. Many customers no longer want to go into debt. And a loan in old age can be significantly more expensive. But of course that is an individual decision.
Sebastian: Please tell me an objective advantage why I should get the money for 2.9 percent from you – and not 2.7 percent from the bank?
Kirchhoff: Because you may not get such a loan from your bank as an old person. With our model, you can help your children while you are still alive and save on inheritance tax…
Sebastian: … I can also … with a loan …
Kirchhoff: Our customers want to capitalize on their property while they are still alive. If you want to do this with a loan, you can try that. But it doesn’t seem to be that easy for everyone.
Sebastian: You repeat yourself. But you don’t tell me any factual advantages, only emotional reasons. I honestly have to say that it’s only worth it for me if I can’t get a loan. They don’t give me an objective argument why I should prefer their model.
The graduate business economist holds the chair for real estate financing and is deputy managing director of the IREBS Institute for Real Estate Management.
(Photo: IREB Institute for Real Estate Management)
Kirchhoff: The possibility of saving inheritance tax with our model is an objective argument for many of our customers.
Sebastian: If the property is half in debt and the money is gone, this is just as little as if you had previously sold a part. So, if you don’t take any risk from a possible depreciation, in my view the model has no right to exist.
Kirchhoff: Yes, you have announced that now. It is true that you cannot recommend every partial purchase model. The lifelong usufruct right of the seller as a right of residence for the entire property should be entered in the land register as with us. It is also important that no implementation fee is due for the later complete sale. Deutsche Teilkauf does not do this at all and does not compensate elsewhere.
Mr. Kirchhoff, Prof. Sebastian, thank you very much for the interview.
More on this: Live at home and top up your pension: This is how you can turn your property into money in old age.