Life Estate
by Vena Jones-Cox

I've been asked if you give someone a life estate, do they have the right to do anything they wish with the property, such as move out and rent it for income? What are an owners rights to the property after they have given someone else a life estate on it? ( such as: are they allowed to go on the property for inspection to make sure the property is maintained and kept up?)

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 their 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 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.

Granting someone a life estate on a property that you intend to eventually make a profit on is clearly a risky proposition. 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 even more below-market than usual—possibly as little as 20-30% of the as-is value.

By the way, there are 2 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 on in his home while receiving an income for it.

Bio:

Vena Jones-Cox’s real estate business focuses on finding great deals on 1-3 family homes, then lease/optioning them to homeowners or wholesaling them to investors and renovators. All told, she buys and sells about 50 properties per year.

Vena is a frequent guest lecturer at real estate investment groups throughout the country, and particularly enjoys working with new investors. Vena frequently authors articles on real estate investment and the regulatory environment for various newsletters and publications, including The Real Deal, her own monthly newsletter. She has been a guest speaker at the Cato Institute in Washington, D.C., lecturing on the effects of lead-based paint regulation on small investors. And in her spare time, Vena hosts a popular weekly call-in radio program on public radio. Real Life Real Estate Investing can be heard throughout the Midwest and throughout the world on the Internet (WNKU.org) Wednesdays from 5:00-6:00 PM EDT.

Vena Jones-Cox is a past president of the Real Estate Investor’s Association of Cincinnati, the Ohio Real Estate Investor’s Association, and the National Real Estate Investor’s Association. She intends to form the International and, eventually, Pan-Galactic Real Estate Investors Associations so she can be president of those, too. Vena Jones-Cox has been featured in publications such as The Cincinnati Enquirer, Smart Money Magazine, Money Magazine and Reader’s Digest in articles about successful real estate entrepreneurs.