Earning an Income at Home: The Potential Perils of Partial Selling
In retirement, dreams of exotic travels, home renovations, or city trips can seem unattainable when your money's tied up in a paid-off home. One solution frequently suggested is a partial home sale. Companies like Wertfaktor, Engel & Voelkers, Heimkapital, or Deutsche Teilkauf offer to buy a part of your property, allowing you to access cash quickly. But before you jump on board, let's discuss the hidden perils that come with this option.
A Sweet Deal With a Steep Price Tag
"It feels like the perfect solution to have both a home and a sizable bank account," says lawyer Beate Heilmann, chair of the Real Estate and Tenancy Law Working Group in the German Bar Association (DAV). "But remember, nothing comes for free."
The steep price comes in the form of a usage fee, typically between 4.5% and over 6% of the value of the sold share annually. For a 200,000 euro payout, for example, a 5% usage fee would mean 833 euros per month after you've already made the sale. Add to that the maintenance and property tax costs you'll now bear on your own.
Buybacks Can Sting
While it's theoretically possible to later buy back the sold share, it'll come at a price. The provider will demand the purchase price for the share, plus additional costs, and a premium for any increase in property value. Some contracts even insure the provider against a decrease in property value, which means they'll take at least their initial investment, plus a 17% surcharge, if the property is sold altogether in the future.
Mists of Opaqueness
Consumer advocates often criticize the lack of transparency and insufficient information in these contracts. The contracts are complex, making it difficult for consumers to get a clear picture of the total costs. Moreover, alternatives to a partial sale are rarely mentioned without prior independent advice.
The Ticking Time Bomb
Owners may not be aware of the speed at which they could lose their home entirely. If, for example, the usage fee cannot be paid, the home may be sold. Even the insolvency of the buyer can lead to the forced sale of the property. This is a precarious situation for affected homeowners.
A Better Route
To avoid the murky waters of partial home equity sales, consider alternative options:
- Borrowing from retirement plans may have lower costs but comes with its own risks.
- Reverse mortgages provide tax-free cash flow without selling the home but come with their fees and inheritance implications.
- Traditional home equity loans or lines of credit typically require repayment with interest but offer more clarity and fewer restrictions than partial equity sales.
Remember, exploring your options, getting expert advice, and carefully evaluating the risks before making a decision is key to preserving your financial wellbeing in retirement.
Source: ntv.de, Katja Fischer, dpa
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- Pension Insurance
- Private Pension Provision
- Old-Age Poverty
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Insights:
- Partial home equity sales, often in the form of home equity agreements (HEAs) or equity release plans, involve risks such as high usage fees, costly buyback obligations, lack of transparency, potentially forced sales, and loss of future equity gains.
- These risks contrast with alternative retirement financing options like borrowing from retirement plans, reverse mortgages, and traditional home equity loans, which may offer greater clarity and lower fees.
- Homeowners should carefully evaluate the costs, obligations, and potential risks before committing to a partial equity sale. Seek expert advice, compare offers, and understand the long-term implications of these agreements.
- In considerations for managing personal-finance during retirement, one might question the advantages of vocational training in areas such as real-estate, finance, or investing to explore alternative methods for retirement funding, like traditional home equity loans or lines of credit.
- After investing in a potentially risky venture like partially selling one's home, it is crucial to evaluate the hidden costs, such as steep usage fees and the potential for forced sales, and acknowledge the potential benefits of state-sponsored pension plans, private pension provision, or old-age poverty programs in supplementing one's retirement income.
