Life Annuity, Partial Sale, Usufruct, Sale-and-Rent-Back Dresden

In short

Annuity, partial sale or a normal sale: what pays off?

For most Dresden owners from around 70, a classic sale followed by a move into a smaller flat brings the most money. A life annuity or usufruct only pays off if staying in your own home is the top priority. A partial sale sounds flexible, but over the years, because of the ongoing usage fees, it is often the most expensive option. A sale-and-rent-back brings the largest lump sum, but it leaves you a tenant with no right of your own in the land register.

Four ways to draw capital from your house and still live in it

Four basic models are on the table. They differ more than the brochures suggest.

Life annuity

You sell the house, keep a lifelong right of residence and receive a monthly annuity. The value of the right of residence is deducted from the purchase price. What is paid out is noticeably below market value.

Usufruct

Similar, but you keep the full right of use and could even let the property. Fiscally interesting for a gift to your children, because usufruct lowers the value of the gift and allowances apply anew every ten years.

Partial sale

You sell a share, often up to half, and receive a lump sum. After that you pay a monthly usage fee on the sold part. Sounds flexible. It rarely is.

Sale-and-rent-back

You sell outright and rent the property back from the buyer. No right of residence in the land register, just a tenancy agreement. Alone among the four models, it turns you into a tenant in your own house.

A partial sale is usually more expensive than a loan

The detail that surprises most people: the usage fee is usually 3 to 5 percent per year on the sold share.

≈ €10,000 / year

on a sold share of €250,000, permanently, without the sum ever getting smaller

A normal bank loan for the same amount would in many cases be cheaper over ten years. You often still bear maintenance alone, and the provider has a say in the later full sale. I have seen owners who, after eight years, found little left of the original advantage.

Sale-and-rent-back: sell outright and stay on as a tenant

Here there is no right of residence in the land register and no annuity promise, only a tenancy agreement. That makes the construction easy to see through. It does not make it safe: your right to stay hangs on contract law rather than on the land register, and that difference only becomes visible when things go wrong.

What tenant protection does give you

You are a tenant with full rights. The landlord may only terminate if he has a legitimate interest (Section 573 German Civil Code, BGB). If he sells the house on, the new owner steps into your tenancy: a sale does not break a lease (Section 566 BGB).

What it does not give you

Personal use remains a ground for termination, for the next owner too (Section 573 (2) no. 2 BGB). The rent may rise to the local reference rent (Section 558 BGB). A modernisation may be passed on at eight percent of the cost per year, capped at 3 euros per square metre over six years, or 2 euros where the rent is below 7 euros (Section 559 BGB, cap under subsection 3a). And in a forced auction the successful bidder may terminate at the statutory notice period (Section 57a Compulsory Auction Act, ZVG).

Good to knowA lifelong waiver of termination in the tenancy agreement is better than nothing. It binds the buyer, and through Section 566 BGB his successor steps into the same duty. For whoever buys the property at a forced auction it does not apply. If you want genuine security, have a right of residence entered in section II of the land register as well, and accept that the purchase price then falls. Both at once, the full price and a right in rem, does not exist.

And the price? Providers who rent the property back buy as investors. They calculate with rental yield, not with the price a family pays for a vacant house. From the notary appointment onwards your house is a let property, and for that the Dresden market usually pays 10 to 20 percent less than for the same property vacant. For detached houses the discount tends towards the upper end, because there is barely an investor market for them. Only those who sell on the open market and move out get the full owner-occupier price. What the size of the discount depends on in an individual case is set out under selling a let property.

In my practice, sale-and-rent-back is usually raised by owners who need a specific sum: buying out a sibling from a community of heirs, converting another flat to be barrier-free, an outstanding loan. For that purpose the model works, as long as moving in five or ten years would not be a disaster. If it would be, it is the wrong model.

Usufruct or right of residence: where most contracts fail

Both rights are entered in section II of the land register, both secure your right to stay, and in conversation they get mixed up constantly. The difference decides whether you may let the property later on. A right of residence over a terraced house in Striesen is worthless the day you move into a care home. A usufruct over the same house keeps earning, because you may then let it and keep the rent.

Usufruct (Section 1030 BGB)

You may draw all the benefits, and that includes letting. If you move into a care home in five years, you let the house and keep the rent. The exercise of the right may be transferred to someone else (Section 1059 BGB). In return you bear ordinary upkeep (Section 1041 BGB) and the running charges such as property tax (Section 1047 BGB).

Right of residence (Section 1093 BGB)

You may use the building as a home, to the exclusion of the owner. Family and carers may move in (Section 1093 (2) BGB). You may not let it: the exercise of the right may only be transferred if the contract expressly permits it (Section 1092 BGB). Public charges stay with the owner.

Priority decides, not the entry itself

A right in section II only helps if it sits ahead of the bank. Rights in section II and section III rank together, in case of doubt by the date of entry (Section 879 BGB). If the buyer finances the purchase and his land charge is entered before your right of residence, you are behind him.

In a forced auction only those rights survive that are taken into account in the lowest bid (Section 52 ZVG). Everything ranking behind it is extinguished when the property is knocked down (Section 91 ZVG). That is why, before every signature, I ask to be shown which rank the right is to be entered at in the land register held by the Dresden local court. If the answer is not rank 1, the question has not been settled, only postponed.

With a life annuity a second safeguard comes into play. The annuity payment itself is entered as a charge on the land (Section 1105 BGB) so that it attaches to the property and not merely to the buyer's solvency. Anyone doing this properly also secures a claim to re-transfer by a priority notice (Section 883 BGB): if the buyer stops paying, the property comes back.

How the three sections are structured and what else they contain is explained in the land register extract in detail.

The four models side by side

The differences are not in the brochure copy but in seven points that the contract either settles or leaves open.

Criterion	Partial sale	Life annuity	Usufruct sale	Sale-and-rent-back
Who becomes the owner?	The provider becomes a co-owner, usually up to 50%. You remain a co-owner.	The buyer becomes sole owner immediately.	The buyer becomes sole owner immediately.	The buyer becomes sole owner immediately.
Payout	Lump sum for the share sold.	A monthly annuity for life, often combined with a lump sum.	Lump sum, reduced by the value of the usufruct.	Lump sum of the full purchase price.
Right of residence in the land register (section II)	Yes, a usufruct. Check that it covers the whole property and sits at rank 1.	Yes, a right of residence under Section 1093 BGB, plus a charge on the land for the annuity (Section 1105 BGB).	Yes, a usufruct under Section 1030 BGB.	No. Only a tenancy agreement, no right in rem.
Running costs & maintenance	Usage fee on the share sold, market standard 3 to 5% per year. Maintenance usually stays entirely with you.	No fee. Ordinary upkeep is on you (Section 1041 BGB), property tax and major repairs on the owner.	No fee. You bear ordinary upkeep (Section 1041 BGB) and the running charges (Section 1047 BGB).	Monthly rent, which may rise to the local reference rent (Section 558 BGB). The landlord bears maintenance.
Typical discount on value	No discount on the share. Instead an ongoing fee and a handling fee for the later full sale, which the contract sets out under realisation.	The capitalised value of the right of residence is deducted. The younger you are, the larger the deduction.	As with the life annuity, and tending to be larger: a usufruct permits more and is therefore worth more.	No discount for a right of residence. But the buyer acquires a let property: in Dresden typically 10 to 20% below the price for the same property vacant.
If it comes to a forced auction	A first-rank usufruct survives the forced auction, a lower-ranking one is extinguished (Section 91 ZVG).	The right of residence and the charge on the land only survive the auction if they rank ahead of the enforcing creditor (Section 52 ZVG).	As with the life annuity: rank alone decides.	The successful bidder may terminate at the statutory notice period (Section 57a ZVG). A waiver of termination does not bind him.
Suits	Almost nobody. Only if no loan is available and the remaining term will foreseeably be short.	Owners from around 75 who need a fixed monthly payment and have no heirs to provide for.	Owners who need a large sum and want to let the property later, often alongside a gift to their children.	Owners who need the full amount now and could cope with moving in a few years.

For comparison, the fifth option that appears in no brochure: with a classic sale you get the full market value, pay nothing each month, and move.

A house in Loschwitz, market value €800,000. With a classic sale and a move into a barrier-free flat in Striesen for €300,000, around €500,000 remain as a reserve, tax-free if the holding period is met. No monthly burden, full freedom of decision. Financially, this option beats the annuity models almost every time.

When does an annuity still pay off?

There is the case where a life annuity or usufruct is the right choice: when staying is non-negotiable. No move, no change, whatever it costs. Then you consciously pay the premium for the security of staying in your own home, and that is a legitimate decision.

Three clauses that have to be in the draft

The rank first: your right belongs at rank 1, ahead of any land charge of the buyer. Then the costs. Who pays for the new roof, the property tax, the chimney sweep? And finally the case nobody wants to think about at the notary appointment: a right of residence is worthless as soon as you no longer live there yourself, and without an agreed compensation for its value you lose it with nothing in return. If one of these three clauses is missing, do not sign.

From my practice: I work out both routes for you: the classic sale and the annuity model you have in mind. With real Dresden figures, not brochure values. Only then do you decide, calmly.

What your property is worth today is shown by the free property valuation for Dresden. For the tax side, it's worth looking at selling tax-free after 10 years.

Note: This information is no substitute for tax or legal advice.

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Frequently asked questions

What is the difference between a life annuity and usufruct?

With a life annuity you sell the property, keep a lifelong right of residence and receive a monthly annuity from the buyer. With usufruct you retain the full right of use, and you may even let the property and keep the rental income. Usufruct is often used for gifts to children because it reduces the taxable value of the gift.

How much annuity do I get with a life annuity in Dresden?

The monthly annuity depends on the property value, your age and the value of the right of residence. Rule of thumb: the older you are at signing, the higher the annuity, because the statistical remaining term is shorter. The value of the lifelong right of residence is deducted from the purchase price, which is why the amount paid out is well below market value. Reputable providers for Dresden are rare; have every offer checked independently.

Does a partial sale of a property make sense?

In most cases I advise against it. You sell a share (often up to 50 percent) and then pay a monthly usage fee on the sold part, usually 3 to 5 percent per year. Over ten years this adds up to a sum that often exceeds a normal bank loan. On top of that come maintenance obligations and a later full sale on the provider's terms.

Do I have to pay tax on an annuity or partial sale?

If you have owned the property for more than ten years or lived in it yourself, the sale part is usually tax-free. The annuity part of a life annuity can be partially taxable (income share). That is a question for a tax advisor, and the amounts justify a close look.

Can I put my house into an annuity and still live in it?

Yes, that is exactly the core of a life annuity and usufruct: ownership changes, you stay. For that to hold, the right of residence must sit at first rank in the land register, otherwise it survives neither a resale nor a forced auction. That rank does not fall into place by itself, it is negotiated in the contract. Ask to be shown it before you sign.

Partner & Property Adviser

Robert Kramer

Solution-finder with many years of experience as a management consultant and managing director

Property annuity in Dresden: life annuity, partial sale, usufruct & sale-and-rent-back