Life Estate Q&A
Q. I am considering buying a property that is subject to a “life estate”. If I buy this property, what rights do I have as the owner? For instance, can I go into the property from time to time to make sure it’s being kept up? And what are the rights of the life estate holder? Can she move out and rent it for income? K.T., Louisville
A life estate is a form of interest in a property that allows the person with the life estate to retain full interest in the property until their death, but vests legal title in another person. It is most commonly used when an elderly parent wants to transfer his or her home to a child before their death, but wants to continue to occupy the property until that time. But it’s also a great, creative way to put together deals with older sellers who want to pull the cash out of their home but have the right to live in it until the end.
Yes, the holder of the life estate has the right to lease—or even sell—the property, but the lease or sale is always subject to the life estate. In other words, the tenant or buyer gets the rights to the property only for the lifetime of the person to whom the life estate has been granted. And yes, the owner of record (you) has the right to enter the property for the purpose of inspection with notice and at reasonable intervals. If the “life tenant” (as the holder of the life estate is called) isn’t maintaining the property, or is doing anything that will permanently damage the value of the property, the “remainderman” (you) can sue the life tenant for damages. You, however, are the one ultimately responsible for paying taxes, insurance, assessments, and so on.
Buying a property that is subject to a life estate on a property has one clear risk: it’s entirely possible that the holder of the estate could outlive you, or outlive the usefulness of the property to you. Remember Jeanne Calment, the French woman who lived to be 122? In her 80s, she sold her apartment to Andre-Francois Raffray, who gave her a life estate and promised to pay her $500 per month until her death. By the time of HIS death in 1995, he had paid twice the market value of the property. Her comment: “Sometimes in life, you make a bad deal.”
Perhaps of greater concern to you is the possibility that the expenses that you pay on the property might exceed the value of the property by the time you actually get possession. For this reason, you need to put pencil to paper before making an offer and figure out exactly what will happen if the life tenant lives 5 years, 10 years, 20 years, or until he’s 122. In all likelihood, you will discover that your offer will need to be significantly below market to make the property eventually turn a profit.
By the way, there are two other strategies that might be better suited to your ends. One is called an Estate for Years, which grants the seller an ownership interest in the property through a certain date—which can be as long as makes the seller comfortable, and gives you the ability to plan when you will get ownership. You can then agree on the price of the property based on the length of the period. The other is a reverse mortgage, where instead of paying the owner a lump sum for the property, you make him monthly payments for some period while he continues to live in the property. Either of these should meet an elderly seller’s need to continue to live in his home while receiving an income for it.
Copyright 2005 Vena Jones-Cox. Reprinted by Permission. From the Real Deal, a monthly newsletter for Real Life Real Estate Investors. [discontinued]National Speaker Vena Jones-Cox has appeared at past MREIA meetings and has been a full-time real estate investor since 1989. She focuses on high-profit, low-hassle strategies that leave her the time and freedom to enjoy financial independence. All told, she’s bought over 600 properties. Vena is also the host of public radio’s “Real Life Real Estate Investing” (Wednesdays at 5 p.m. est at wnku.org), a live weekly program that addresses all aspects of real estate investing. She’s past president of Cincinnati REIA, Ohio. Email: firstname.lastname@example.org or visit www.regoddess.com