What is repurchase sale?
Definition of repurchase sale or sale with right of repurchase
The repurchase sale, or sale with the option of repurchase, consists of an owner (the seller) selling real estate to a buyer (the repurchase or investor), all reserving the right to repurchase it laterat a price agreed in advance, within a time limit set by the parties.
Sale with repurchase in real estate: Civil Code
The repurchase sale is an operation provided for by the items 1659 to 1673 of the Civil Code. The repurchase sale is therefore a real sale. It is distinguished from a loan repurchase or a real estate portage by its legal nature: the transfer of ownership is real at the end of the sale, but conditioned by a possibility of subsequent repurchase.
Repurchase sales organizations
THE specialized intermediaries (repurchase agencies, real estate portage) support the seller in the search for an investor and financial structuring. Since the 2010s, the DGCCRF and the Superior Council of Notaries have increased vigilance on this type of operation to avoid practices comparable to usury or disguised forced sales.
How does repurchase sales work?
Repurchase sale: intervention of a notary required
The repurchase sale is concluded before a notary who is responsible for both advising the seller and drawing up the deed. The latter ensures the legal validity of the actinforms the parties of their rights and obligations, and ensures the security of the transaction. He draws up the authentic deed of sale with the option of redemption.
As in the case of a traditional sale, the buyer can be found privately or through a real estate agency. There are also certain companies specializing in this type of operation which serve as intermediaries.
Estimation and determination of conditions
Before signing, the seller must have his property valued by a professional to determine both the sale price and the repurchase price, fixed contractually. During this period, the seller remains the occupant of the property, but is no longer the owner. In return, he pays the buyer a monthly occupation allowancetreated as rent.
Repurchase sales contract
The operation of the repurchase sale is of course based on a contract, which specifies all of the conditions of the operation. He mentions in particular:
- the initial sale price and the agreed repurchase price;
- the duration of the redemption option;
- the amount of the occupation compensation;
- the costs to be reimbursed when exercising the option (notary fees, taxes, possible expenses incurred by the purchaser for the maintenance of the property).
The notary ensures that the repurchase clause complies with the law and that the seller understands the consequences, such as the risk of losing the property in the event of non-purchase within the specified time frame.
Purchase deadline for repurchase sale
The redemption period is between six months and five maximum years. This deadline is imperative and cannot be extended, even by judicial decision. During this period, the buyer is the full owner of the property: he assumes the costs and risks, although the seller can continue to occupy it against payment of the compensation provided.
When the deadline expires
When the deadline expires, two situations may arise:
- The seller manages to buy back his property : he exercises the right of redemption, reimburses the purchaser the price, the costs incurred and, where applicable, the expenses incurred on the property. He becomes full owner again.
- The seller fails to repurchase the property : he permanently loses ownership of the home (often his main residence). In this case, he becomes an occupant without rights or title and must vacate the premises.
Bank loan vs. repurchase sale: why avoid the loan?
For an owner in difficulty, obtaining a loan becomes very complicated or expensive (usury rate, guarantees required). The advantage of repurchase sales is that it is not based on traditional credit : the seller temporarily transfers his property to an investor for an immediate sum, without having to receive a loan which he would repay with interest.
What are the advantages of repurchase sales?
An immediate financing solution
The sale at repurchase offers the owner the possibility to quickly obtain liquidity without going through a banking establishment. It benefits from direct financing without additional loan interest. This solution is useful for dealing with urgent financial difficulties, such as tax debts, risk of seizure or a banking ban.
A financial restructuring tool
The repurchase acts as a financial recovery lever : this is a debt restructuring tool which often avoids property seizure and the sale by auction of the property. By cleaning up its situation, the seller can obtain the lifting of a registration with the FICP of the Banque de France.
This mechanism is therefore aimed at people in a situation of over-indebtedness, but still having a real estate asset that could serve as a temporary guarantee.
An alternative to keep your home
The repurchase sale allows the seller to stay in the accommodation by paying an occupancy compensation to the buyer for the entire duration of the contract. This fairly long-term continuity of occupancy, combined with the option of repurchase, makes the repurchase agreement a transitional solution between sale and retention in the property.
What are the risks of repurchase sales?
Permanent loss of property
In the majority of cases, the main risk is the total loss of the property if the seller fails to repurchase the property within the stipulated period. The operation is based on a future borrowing and repayment capacityoften uncertain. Failing this, the seller becomes a simple occupant without rights or title.
An uncertain operation
The repurchase sale can be compared to a bet on improving financial situation from the seller. It all depends on the extent of his debt, the evolution of his income and his ability to obtain a bank loan for the buyout. Intermediaries and specialized investors therefore study each file with caution.
Costs not to be underestimated
The repurchase sale entails several financial charges. The occupying seller must pay a monthly occupation allowancethe amount of which can represent a significant expense. Upon redemption, he will have to reimburse the principal price, but also the costs incurred by the buyer. Thus, the repurchase must be considered as a costly temporary measure.
What is the tax on a repurchase sale?
General principle of repurchase taxation
From a tax perspective, the repurchase sale is considered a real real estate sale from the start of the pact. Consequently, the tax rules that apply are those of a classic transfer. The transfer of ownership being real and immediate, the sale triggers registration fees and may, where applicable, result in taxation on the capital gain.
On the other hand, if the seller then exercises his right to repurchase within the agreed period, certain initial tax consequences can be neutralized or corrected.
Taxation during the repurchase period
During the repurchase period, the seller is no longer the owner of the property: he becomes the occupant in return for the payment of a monthly occupancy compensation. This compensation, although equivalent to rent, does not have the same legal nature :
- For the seller, it is not deductible nor considered as rent.
- For the purchaser, it can be considered as taxable property income.
- The property leaves the seller’s assets: it is therefore no longer subject to property tax.
Taxation in the event of repurchase of the property
When the seller exercises his right to repurchase within the stipulated period, the tax authorities consider that this is a resale by the purchaser and a repurchase by the initial seller. The operation therefore gives rise to a new notarial deed, again leading to the payment of transfer duties. However, the tax administration sometimes authorizes a partial neutralization of taxation :
- if the repurchase option is exercised within a short period of time (often less than 12 months);
- and if the property has not been exploited or resold to a third party during this period.
In this case, the administration may consider that the first sale did not result in a definitive transfer of ownership from an economic point of view, and the initial capital gain may be rectified or canceled.
What is the difference between real estate portage and repurchase sale?
Legal nature
The repurchase sale is a real sale with the option of repurchase: the seller transfers ownership of his property to a buyer while reserving the right to take it back. Real estate portage, on the other hand, is not based on a legal framework. This is a private contractual arrangementdeveloped by specialized companies.
Convenient operation
In a repurchase sale, the owner sells his property to an investor to obtain immediate liquidity. Real estate portage works differently: the property is bought by an umbrella company who becomes the legal owner, but the seller can remain domiciled there as an occupant.
Often it becomes minority partner of the company holding the property or signs a promise of repurchase guaranteeing the possibility of recovering the property after a defined period of three to five years. The repurchase then takes place at a price agreed from the outset.
Objective
There sale at repurchase is aimed at owners in immediate financial difficulty. This is a last resort solution. Real estate portage, for its part, targets more varied financial situations. It is aimed at owners wishing to preserve the value of their assets or avoid the permanent sale of their property, while temporarily obtaining funds.
Concrete example of repurchase sale
The owner of a house in Lyon has contracted several tax debts and risks having his property seized. He decides to carry out a repurchase sale for get cash quickly.
- The property is sold to an investor for 250,000 euros, against an estimated real value of 320,000 euros.
- Upon signing the deed of sale, it is expected that the owner will be able to repurchase his property within 24 months at the agreed price of 265,000 euros, i.e. the initial price plus costs and compensation.
- He stays in his house for these two years and pays the investor a monthly occupancy allowance of 900 euros.
Two years later, having restored his financial situation, he obtained a bank loan and exercised his right of redemption. He becomes the owner of his property again. If, on the contrary, it fails to repurchase within the allotted time, the investor becomes definitely owner.
>> Our complete guide to the buyer. How to finance your real estate project? Choosing between the new and the old? A house or an apartment?
