Explaining the viager system
You can buy property by gambling on how long someone is likely to live.
France has a peculiar and unique way of buying and selling homes - called Viager - a system based on gambling on how long a seller is likely to live.
It promises tantalisingly good, if risky, deals for buyers - and lots of security for the seller.
However, you have to be brave enough to roll your dice and gamble with rather a lot of cash - and carry on doing so for many years, for a viager deal to work out.
The viager system is similar to the equity release offers you see advertised on daytime television in the UK - but with a big twist.
For a start it does not necessarily involve big banking or insurance companies.
It is a contract agreed between two private parties and overseen by a lawyer, notaire or an Expert Viager who will track the deal throughout its lifetime.
Sellers are typically widows, or widowers, who want to cash in on the value of their property in order to get a big lump sum - the bouquet - and a monthly payment from the buyer for the rest of their lives.
The seller remains in the property and the payments are heavily guaranteed.
French viager investors tend to be in their late 40s and early 50s wanting to set themselves up with a retirement home and hopefully get a good deal. The overall payment is calculated according to the age of the seller on a scale set down by French law.
If the seller is 70 years old, for example, the value of the property will be set at about 50%. This is called the valeur occupée or occupied value.
From this the bouquet, typically about 30% of the valeur occupée, must be paid in full at the beginning of the deal.
The rest is paid in monthly installments for the rest of the seller’s life.
However, if the buyer dies before the seller his children will be obliged to carry on paying the viager if they want to maintain the deal. So if the market value of the property is €200,000, the valeur occupée, of the house will be about €100,000, although this figure is also variable. If the bouquet is €30,000 then the remaining €70,000 will be paid out in installments for the rest of the seller’s life.
How much must be paid is based on a rate calculated from average life expectancy in France. This is calculated on a graded scale laid down by French law.
For a 70-year-old seller the rate at which the remainder of the valuer occupée is paid is currently set at 7.24% a year. In this example the annual payment would be €5,068, and the monthly payment would be €422.33. This figure is index-linked and goes up every year with inflation.
At this initial rate the seller would recoup the remaining 70,000 over about 14 years. However, if the seller dies within, say, two years, the property, with a market value of €200,000 would be in the buyer’s hands at the bargain price of just over €40,000.
Should the buyer default on payment, the seller keeps the bouquet, all the money received so far and gets back absolute ownership of the property.
If all goes well, when the seller dies the property is then taken over by the buyer having spent much less over time than on a mortgage. Hopefully.
Today some people live much longer than the national average life expectancy. Nevertheless entering into a viager contract is becoming increasingly popular in France as a means of raising funds and buying houses. The system is also open to buyers from anywhere in the world.
Jacques Benne, a Nice-based lawyer and notaire with more than 40 years experience, says entering into a viager contract is a “win-win” situation for everyone involved, with big tax breaks for sellers and an interest-free purchase for buyers.
If a loved-one dies, household income may reduce significantly while outgoings will remain the same. Entering into a viager contract means you can raise a lump sum in cash and also a monthly payment for life, based on your age and the value of the property .
Mr Benne said: “Old people don’t want to move out of their house or away from their friends.
“They will get a big cash sum and know that they will get a pension for the rest of their lives. On top of this, after the age of 70, only 30% of your viager income has to be declared to the French tax authorities.”
He added: “The best bit for the seller is the absolute guarantee of payment. Should the buyer default on the monthly installments, he will be written to and warned to pay up. After a second warning, normally within weeks, he will get a further warning and one month to get up to date with payments.
“If this does not happen the seller keeps everything - the bouquet, all the monthly payments so far and absolute ownership of the property. It has been known to happen. The viager is extremely well protected.”
For the buyer, a viager deal can get you a great value property at massively reduced rates if you are prepared to begin investing in your future property many years before you actually take possession.
For a start, the value of the property is effectively halved as it is the occupied not market value which is used for calculation purposes. Also, compared with paying a mortgage that will see you paying much more than the actual value of the property, you pay absolutely no interest.
Mr Benne said: “It’s a game of hazard in a way, because nobody can foresee how long a seller is going to live.
“But it’s a calculated risk that can turn out extremely well indeed.
“I entered into a viager contract some years ago, and when I visited the widow for the first time she looked so fit and well I thought I had got a bad deal.But two years later I got a call saying she wanted to see me. She was going into hospital. Two days later I was told she had died during the operation. I got an extremely good deal from the chance I took.
"It doesn’t happen all that often but it’s not unheard of. It is very rare for a seller to live so long that the deal becomes an expensive millstone around the neck.
“Stories of sellers outliving buyers are fairytales,” she said.