Is Grandma having trouble with her property taxes? A new Manhattan-based startup wants to buy her house and let her live there, for free, for the rest of her life.
This makes sense as a business for a couple of reasons: For one, seniors have the nation’s highest homeownership rate. Close to 80 percent of Americans over age 65 own their homes. At the same time, older Americans are increasingly likely to retire without the savings to see them through their twilight years. In 2013, median retirement-account savings for families age 56–61 was just $17,000—and even the mean, $163,577, is considered far below the recommended rate of 10 times your salary.
Put the two together, and you’ve got the idea behind the startup, Irene. The company will even take care of property taxes and maintenance, so your grandparents don’t have to clear out the gutters or risk falling into foreclosure. The trade-off: a sale price far below market value.
“Millions of seniors who are homeowners have lots of savings in the house, but not outside,” founder and CEO Fabrizio Tiso explained to me. “They’re what’s called ‘asset-rich, cash-poor,’ and as they adjust to retirement, their income reduces, and they can’t afford the house.” Slammed by a steep decline in pension coverage, smaller Social Security benefits, longer life spans, and higher health care costs, older Americans don’t have enough dough. In response, they start working again, or downsize, or depend on their children.
Yet the cohort has lucked out in the housing market. The percent of all home equity held by Americans over age 60 has shot up from 24 percent in 2006 to 41 percent as of last year, thanks to a persistent housing shortage that has driven up home prices in and around most big cities.
Thirty years ago, banks started issuing reverse mortgages (or home equity conversion mortgages—HECMs) to solve exactly this problem, by letting seniors take out a loan against the value of their home. The amount you can borrow is determined by home value, market trends, and life expectancy, and calculated to ensure that the loan plus interest doesn’t exceed the value of the house by the time the borrower has died. (Basically, the fewer years you have left to live, the more money the bank is willing to lend.)
A wave of post-crisis HECM foreclosures led the Department of Housing and Urban Development to tighten up the rules, though most retirement-finance experts say the product is one that should be more widely used, not less. “I don’t think it should be viewed as a risky financial instrument,” argued Sarah Mancini, an attorney with the National Consumer Law Center. “It’s a lack of understanding that makes people very cautious of going down this road.” If anything, she said, it’s possible HUD has made reverse mortgages too difficult to obtain, by restricting them to seniors with expensive homes. Just about 55,000 reverse mortgages were issued in fiscal year 2017.
Tiso, who worked in retail banking and fintech at Boston Consulting Group before founding Irene last year, says he also heard about this problem firsthand. Especially in states with high property tax rates (like New Jersey, where Irene began operating earlier this year), just holding on to a house can require massive payouts every April. In many cases, Tiso said, seniors struggle not just to pay for travel or medical care, but for the expenses on the home itself.
Tiso didn’t have to invent this idea. The right to live in your house for the rest of your life is called a “life estate,” and the IRS has tables that determine life-estate value (a function of home price and life expectancy). If you’ve got 15 years to live, the value of your life estate (think: 15 years’ rent) might be more than half the value of your house. So when Irene makes clients an offer, the sum might be just half what the home would fetch on the open market. In return, though, the sellers get to live there for free the rest of their days.
How successful is Irene so far? Tiso wouldn’t tell me how many houses the company has acquired, though since Irene just got its seed funding a few months ago, it’s safe to assume that number is low. It’s a capital-intensive model, after all, and the payoff for each investment will be a long time coming.
The model carries some risks, I was told by Julia Gordon, the executive vice president at the National Community Stabilization Trust. Having to call on a third party to deal with maintenance is one of the more unpleasant aspects of renting. But in other ways, she said, it’s of a piece with a larger trend: More and more single-family homes are being purchased by investors as rental properties.
There’s a kind of morbid bet at work here. Tiso said Irene is a long-term property investor, but the company’s financial fortunes are dependent on the well-being of its tenants. If a 70-year-old receives a $200,000 cash payout for the right to live until he dies in a $400,000 house but dies the next year, Irene has made a great deal. If he lives to be 105, the company is stuck paying for decades of taxes and maintenance.
The more expensive your house, the more tempting the prospect of such a contract: Hugh Hefner actually sold the Playboy Mansion with a lifetime-rent clause shortly before he died. But these arrangements are common elsewhere too. Buyers use similar contracts to help seniors unlock home equity without moving out in France (a viager) and in Tiso’s native Italy. Under the French system, buyers are prohibited from researching occupant health, and sellers have been known to act frail to obtain a good deal—springing back to senior tennis matches before the ink on the contract is dry.
In sum, it’s probably a good idea for some seniors—though one that can hardly measure up to the scope of the problem. Other concepts are bubbling up through public policy. “I’m a big fan of using home equity in retirement,” said Alicia Munnell, the director of the Center for Retirement Research at Boston College. “The vast majority of people are not going to have enough.” In wealthy Massachusetts, she said, high property values and taxes offer a grim prognosis to seniors. Her organization has proposed offering seniors a deferred property tax, which would allow them to pay off property taxes, with interest, when they die or sell their house. The more the options the better: America’s aging population is going to need them.