Purchasing a property via a life annuity (en viager) – a real opportunity or a pitfall best avoided?

Purchasing a property via a life annuity (en viager) is rare in Luxembourg, accounting for only a tiny fraction of real estate transactions. However, this type of purchase does offer some potential advantages. How does purchasing a property via a life annuity work? What are the pros and cons for a buyer?

What is meant by a real estate sale via a life annuity?

It is a transaction between an owner (crédirentier) who sells a property to a buyer (débirentier) in return for the payment of an initial lump sum (bouquet) and a regular annuity.

Unlike a traditional real estate purchase that is settled by the payment of a single sum, settlement takes the form of a regular annuity (monthly, quarterly or annual) that is paid until the death of the vendor. The total purchase price is therefore uncertain, as it depends on the life expectancy of the vendor.

This is also why this type of transaction is sometimes referred to as a sunk costs transaction – a term derived from the insurance sector where premiums paid belong to the insurer even if the risk covered never materialises (e.g. life insurance premiums paid whilst the policyholder is alive).

→ Useful info: the uncertain nature of the agreement is key. To be valid, the buyer must not be aware of any health issues of the vendor prior to concluding the sale. The date of death of the vendor must be unpredictable. What’s more, the transaction may be annulled if the vendor dies of an illness within 20 days of signing the agreement.

Properties sold via a life annuity may be occupied or vacant

In Luxembourg, there are different ways to sell a property via a life annuity – usually the property is sold occupied, although in rarer cases it may also be vacant. The sales agreement defines the various terms and conditions of the sale.

Traditionally, the property is sold as occupied (viager occupé) and the vendor retains the right to use and inhabit the house – after the sale, the vendor can remain in the property until their death. The vendor may also retain the usufruct, which means that the vendor can let out the property, for example, if they decide to move into a retirement home. Meanwhile, the buyer only receives unrestricted ownership of the property after the death of the vendor.

In the case of a property sold as vacant (viager libre) the vendor may no longer live in the house after the sale. Unrestricted ownership of the property is transferred to the buyer as in a standard real estate transaction. The buyer has the right to live in the property or to let it out immediately.

Like any property purchase, an acquisition via a life annuity requires a notarial deed. In both cases, an initial lump sum is generally paid upon signature of the agreement and an annuity is paid until the death of the vendor. However, in some cases the agreement may stipulate that there will be no initial lump sum or no annuity payments.

It is also important to note that the property sold via a life annuity must be sold without a mortgage. The buyer is also not able to mortgage the property to finance the purchase.

→ Useful info: it is possible to restrict the period during which the annuity is paid and/or the property can be occupied. This is referred to as a time-restricted life annuity (viager à terme). The deadline set must be respected, even in the event of the death of the vendor, in which case the annuity is paid to the vendor’s heirs until the date defined in the agreement.

The buyer undertakes to pay an annuity until the death of the vendor, without really knowing exactly how long the vendor will live.

How much does it cost to purchase a property via a life annuity?

This type of purchase is a bet on the future. The buyer must be aware that they are agreeing to pay an annuity until the death of the vendor, without really knowing exactly how long the seller will live. If the vendor dies before the estimated date, the buyer will get the property at a lower price than its real value. On the contrary, if the vendor lives for longer than estimated, the price paid will be higher than the value of the property. The actual price that will be paid for the property is therefore unknown (except in the case of a time-restricted life annuity).

→ Useful info: in principle, the annuity is paid to the vendor, but the sales agreement may stipulate several recipients of the annuity (joint and survivor annuity). If there is a survivor clause, the payment may be transferred to the surviving spouse upon the death of the first spouse.

The amounts payable to the vendor are calculated as follows: the total of the initial lump sum and the annuities paid until the estimated date of death of the vendor must be equal to the value of the property. It is therefore advisable to have the real estate valued by a professional.

The initial lump sum can be any amount agreed upon by the parties and is paid upon acquisition. It generally represents between 30% and 50% of the value of the property.

The annuity amount depends on several criteria: whether the property is occupied or vacant, the lump sum amount, the age of the vendor and their life expectancy (based on official statistics), etc.

The principles used in the calculation are as follows: for a vacant property, the annuity corresponds to the price of the property less the lump sum paid. This figure is then divided by a coefficient that corresponds to the life expectancy of the vendor. The calculation is the same for an occupied property, but a discount is applied to reflect the fact that the property is occupied by the vendor.

The annuity payments are lower for an occupied property than for a vacant property, to compensate for the fact that the property cannot be used.

The size of the annuity is therefore lower for an occupied property than for a vacant property, as compensation for the buyer being unable to use the property. The annuity is indexed to the consumer price index and will therefore change over time.

Cancellation of the sale in the event of non-payment of the annuity: the vendor can have a termination clause included in the sale agreement to offer protection from non-payment of the annuity by the buyer. If the buyer fails to meet their payment obligations, this clause allows the vendor to cancel the sale and, depending on the terms of the agreement, to keep any annuity payments already made.

The advantages of purchasing a property via a life annuity

Such a sale is of course interesting for the vendor, who can secure a decent level of additional income in retirement whilst continuing to live in their own home. There are also several advantages for the buyer.

• • The uncertainty could work in the buyer’s favour: one of the advantages of purchasing a property via a life annuity is also its major risk. The buyer could get the property at a price that is below its real value should the vendor die earlier than estimated.
  • A cheaper purchase price: if the property is occupied, the annuity includes a discount to reflect this fact that reduces the final price paid for the property. Similarly, the registration and transcription fees due on the sale are also reduced.
  • Lower debt requirement and interest payments: any loan needed to finance the purchase of the property will be lower for a purchase via a life annuity, or a loan may not be required at all. Apart from the initial lump sum, the annuity is paid gradually to the vendor, in the same way as monthly interest payments on a loan but without bank interest. However, given the price of real estate in Luxembourg, most people will need to take out a loan just to cover the payment of the initial lump sum.
  • No upkeep costs on the property: for a property that is sold as occupied, the ongoing maintenance and upkeep costs are payable by the vendor.

Lastly, it’s worth noting that in the case of a property sold as occupied, the fact that the price is fixed in advance (for the initial lump sum and the annuity) is an advantage in a market where property prices are constantly rising. Conversely, in a market where property prices are falling, this represents a loss for the buyer.

The disadvantages of purchasing a property via a life annuity for the buyer

For the vendor, the main issue with such a sale is that their heirs may be dissatisfied with an arrangement that reduces their inheritance. As far as the buyer is concerned, there are a few issues worth considering.

• • The longevity of the vendor: the main risk when purchasing a property via a life annuity is uncertainty regarding the lifespan of the vendor. If the vendor lives for longer than estimated, the annuity will be paid for a longer period and the buyer will pay more than the real value for the property.
  • The buyer does not have the use or enjoyment of the property: if the property is sold as occupied, the buyer does not know when they will be able to use the property. The buyer cannot live in the property nor rent it out prior to the death of the vendor if the vendor retains usufruct of the property.
  • The obligation to pay the annuity is transferred to the buyer’s heirs in the event of the death of the buyer: if the buyer dies before the vendor, the buyer’s heirs are obliged to pay the annuity to the vendor until the death of the vendor.
  • The cost of major construction work: for an occupied property, the buyer must pay for any major construction and renovation work, such as work on the roof, facade, etc.

The buyer must be fully aware of the inherent uncertainty involved before signing an agreement to purchase a property via a life annuity.

Although purchasing property via a life annuity may have negative connotations, it does offer some real advantages for both sides. The vendor can continue to live in their home whilst receiving additional income for the rest of their days, whereas the buyer may be able to purchase the property for a lower price.

However, the buyer must be fully aware of the inherent uncertainty involved before signing an agreement to purchase a property via a life annuity. It is a good idea to involve a notary or an expert on this type of transaction for advice on the type of clauses that should be included in the agreement (purchase with or without the transfer of usufruct, payment of an initial lump sum, annuities, any time restrictions, etc.), as well as any best practices such as a minimum age difference between the buyer and vendor, investment diversification to minimise risk, etc.

* According to Eurostat, in 2023 the life expectancy in Luxembourg will be 81.7 years for men and 85.1 years for women.