In Velázquez Street, Madrid, a property has just sold for 807,500 euros. This is a 15% discount on the market price, but it was done with a special purpose. The sellers, a 78 year old husband and his wife of 75, get to continue living in their home, remaining as tenants for 10 years paying a monthly rent of 2,500 euros. They also have the option to call on the equity to pay the rent up front. This equity release would deduct a further 120,000 euros off the final price, making it 687,500 euros. There are advantages to a prospective buyer; a discounted property in the city centre with a guaranteed rent. These ‘sale & lease back’ schemes are not new. In fact, in recent years they have been the lifeline of companies, institutions and banks to attain liquidity.
Now the market is expanding into the domestic arena. The majority of investors attracted to such a scheme do so with an eye on the medium term market. They tend to sell the house on the death of the tenants. It is a formula that is beginning to attract ‘buy to rent’ purchasers. They can leverage their mortgage application with the guarantee of tenants and a rental income from the beginning. So explains Nacho Espejo, commercial director of Kategora. This Bilbao firm specialises in the management of real estate assets and aims to expand to Madrid and Barcelona next year.
This particular rent-back venture is aimed at the retired property owner looking to sell and takes into account the age and needs of the would be tenant, since the leases are usually made for a period ranging from between 10 and 20 years. However, the tenant can terminate the contract at any time.
What’s in it for the purchaser?
The buyer benefits from discounts of between 15% and 20% on the market value, explained Carlos A. Martinez Cerezo, managing director of the company, Retiro. And in some cases this can reach 50%, says Jacobo Armero, associate agent at Re / Max Clásico. After revaluation of the property there’s a gross return of between 4.73% and 4.75% per annum (after deducting ordinary and extraordinary fees, IBI and home insurance). This figure is slightly higher than the national average. According to the Bank of Spain, this compares to 4.6% in the fourth quarter of 2015 and movement is dependent on the given city. Bilbao is between 2% and 3%.
The homes that attract this sort of investor typically have an average value of 400,000 euros and are located in the most attractive areas of the cities. When dealing with fixed amounts, there are creative alternatives that can be introduced, such as reducing the purchase price even further in exchange for rent in advance. This helps liquidity by making the asking price even lower compared to comparative housing on the market.
What’s in it for the Seller?
Assuming the seller is over 65, there are also advantages. They get an injection of liquidity to meet their care needs and this lump sum is exempt from personal income tax. Plus, they get to remain in their homes for a set period of time and can contract for that to be a life interest. More than 80% of Spaniards express a wish to be cared for at home when they are older.
Excerpt taken and translated from El Pais