Building ADUs on a property with a single-family home or multi-family building has become the most popular way to think about multi-generational living or generating income during retirement. (The New York Times reports on the popularity of ADUs — although ignore the very low prices per square foot quoted!)
But what if it turns out you need a lot more money than you can get by renting out one of your units?
Can we have it all as we age — and make money by selling our house while not actually having to leave our house? It depends. Read on to learn about “life estates.”
Investopedia defines life estates as “a property, usually a residence, that an individual owns and may use for the duration of their lifetime. This person, called the life tenant, shares ownership of the property with another person. This person is called the remainderman, and automatically receives the title to the property upon the life tenant’s death.”
Wow, so we could sell off our property and structure the sale so that we could live in an ADU on the property for the rest of our lives?
The first time I saw a home for sale with a “life estate” clause was in a small town in Maine. So many questions came up!
The property had 2 houses on 1 lot. A requirement of the sale was that the seller / owner would have the right to live in one of the houses for the rest of their lives.
With the Maine life estate property, questions that immediately came up were:
- How much of the property could the “life tenant” use?
- Could they have parties?
- Could they rent out their house or Airbnb it?
- Would it make sense to commit to buying a property not knowing if we would like the previous owner, who could be there for 30 years?
- Was the life tenant going to pay for utilities and maintenance? Those are especially important things to think about before leaping in with 2 feet into a life tenant situation.
Today I saw my first life tenant property for sale in California. Berkeley to be exact.
This Berkeley property for sale has 2 homes on 1 lot — and comes not only with a tenant but a requirement that the tenant can live their life in that house.
The sellers were turning the property into a legal duplex.
Would the buyer be able to split the lot into 2 properties with SB-9 or build additional dwellings / ADUs if the property is a duplex?
It turned out buyers and agents weren’t the only people with questions about a life estate property.
Lenders weren’t sure how to handle it. So, they arranged for a 30-year lease to replace the “life estate” agreement for purposes of lending.
Life estates aren’t common but given the many properties adding 1 or more ADUs in California, the idea of either splitting a lot into 2 separate properties with SB9 or planning for a life estate / long-term tenancy agreement are 2 ideas for aging in place that deserve deep dives for our future.
Aging in place, for those who love their homes, is going to become more and more important.
The more structured arrangements become, the easier it will be for home owners to have their cake and eat it too! (That is, sell their house to provide someone else the chance of home ownership while staying on the property!)
The first step is to speak with an experienced real estate lawyer about options.