Would you buy a house at a big discount if it came with a catch?

Last year, Sherry Fitzgerald Reynolds put a house on the market in Donegal for €299,000. It’s a substantial six-bedroom multi-unit property in Letterkenny, and it comes with an adjoining three-bedroom townhouse and stationary mobile home. In need of refurbishment, it nonetheless offers “immense potential to a savvy purchaser”, according to the agent and is still on the market at a heavily discounted price.

The catch?

Someone is still living in the property and will be there until they die.

Known as a “life interest”, this gives a tenant (usually the current owner of the property or a close relative) the exclusive right to live in the property either until they die or move out and thus relinquish the right. It’s different from a “right to reside”, which allows someone to live in a property but doesn’t give them an exclusive right to do so, which means that other people can move in with them.

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While rare, when such properties do come to the market, they typically do so at a heavily discounted price. It’s a transaction that’s more common in France, particularly along the French Riviera, where under the viager system, a homeowner sells a property at a discount but retains the right to live there until death. In addition to buying the property, the new owner must also make regular payments for the rest of the seller’s life.

Somewhat different then, to the life interest in Ireland, but what the two regimes do have in common is that in cold financial terms, you are buying a property at a discounted price – and taking a chance on how long the life tenant survives.

“If the life tenant does not survive long after the purchase, it will have worked out well for the purchaser. If the life tenant lives to be Ireland’s oldest lady, you might not have done so well,” says Cathal Lawlor, a tax adviser with Lawlor Kiernan.

Rosemount House, Rosemount Lane, Letterkenny, Co Donegal. Photograph: Pat Gallagher

Agent Austin Reynolds, a director with Sherry Fitzgerald Reynolds and agent of the aforementioned Letterkenny property, says that such an arrangement is “very unusual” in the area.

The three-bedroom townhouse is occupied by the sister of the former owner, who is recently deceased – and can remain there as it is occupied on a life interest basis. Typically, people wait to put properties on the market until the occupants die or move out, he says.

Indeed, Lawlor says that he often sees people leave a property in their will that is subject to a life interest.

“But it is less common to see a property being sold subject to life interest,” he says. “Purchasers need to be aware that someone else has exclusive use of the property while they are alive and their ability to participate in the property is very restricted.”

This means a smaller pool of potential purchasers.

The Letterkenny property has been on the market for the “best part of a year” now. Oftentimes such properties will only be of interest to a cash buyer, as a bank may not be willing to lend on the property as is, although AIB says it is open to lending “where a family member has an agreed right to residency, subject to terms and conditions”, and will be determined on a case-by-case basis.

“I would envisage someone willing to take a chance on something will buy it,” says Reynolds. “If someone was to buy it now, it would represent an opportunity because at some stage they would take ownership.”

Of course, a discount is at play; marketed at €299,000 for the entire property, Reynolds says that the townhouse alone could command about €200,000-€220,000 if sold separately.

Property for auction in Marino with a life interest

And it’s not the only property currently on the market with a life interest. In Marino, Dublin 3, auction house BRG Gibson recently brought a three-bedroom end-terrace property to market, with a life interest, and an AMV of €225,000. As a comparison, three-beds in the area would typically fetch north of €500,000.

It went for auction on March 27th and sold for €225,000.

Typically, in the case of a life interest, the discount will depend on factors such as the life expectancy of the vendor. To calculate the value for tax purposes, a discount factor will be applied based on the life tenant’s age and sex.

Lawlor gives the example of a property with a market value of €500,000. For a male aged 65, the life interest factor is 0.5310, which means the value of the life tenant’s interest is €265,500, and the value of the remainder interest is €234,500.

As women live longer than men, the life interest value for a woman will be higher.

But a discount may not be offered at a similar level when the property is put on the market.

“This is the value for tax purposes, but it may not be realistic for commercial purposes,” says Lawlor.

Blackrock village. Photograph: Nick Bradshaw

Several years ago, a house was sold in this manner on Blackrock’s swish Idrone Terrace. The vendor, who had lived in the sea-facing property for 50 years, wished to remain in the house, in a suite of rooms on the second floor, while the buyer could live in the rest of the house.

“This would allow the new owner to enjoy the majority of the house with a view to future renovation/upgrading at a later stage,” the property advert noted at the time.

The property came to the market seeking €1.18 million and sold for the same amount, according to the Property Price Register – as a comparison, a similar property on the same terrace sold for €1.3 million that same year.

Local agent Janet Carroll, who handled the sale, said there was plenty of interest in the property. Interested buyers are often those who live abroad with a view to coming back to Ireland at some stage – and so may not live in the property with the owner, she says.

“A lot of the time, people who buy it won’t ever go into the property until the person has passed,” she says.

A reason vendors look to sell this way – rather than leave the property pass to their estate when they die – is that they want to liquidate the asset now, maybe to give a deposit to their children, to do a bit of travel, or do repairs on the property.

“They can access cash, which they can use for their own purposes by selling part of the asset, but securing their right to live there at the same time,” says Lawlor.

It’s an alternative to a lifetime loan, which has the potential to cost more over the long run. With a lifetime loan, for example, the cost of meeting interest can eat away at the equity on a house.

For those considering such an option, “sell with no one moving in would be my preference”, Carroll advises, and they should also consider interviewing the person buying the property if they do intend to move in.

“There has to be chemistry,” she says. Carroll also has experience of someone needing care, and coming to a life interest agreement with a family who would care for them until the end of their life, and then inherit, or part-inherit, the property.

“It’s like adopting the family,” she says.

But it must be done with great caution.

“For someone sick, infirm, or lonely, I can’t state how important it is to get advice,” she says.

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Lawlor agrees that both parties will require proper formal legal advice. And agreements will need to be reached around how the property is maintained and repaired.

“For example, a life tenant may have to pay LPT, but who should be paying if a boiler needs replacement, or a roof needs to be repaired? These aspects will be fraught with difficulty if not agreed legally at the outset.”