Living cheaper?: Leaseholds have these advantages and disadvantages

For some people, home ownership is a long way off.

Living cheaper?: Leaseholds have these advantages and disadvantages

For some people, home ownership is a long way off. Real estate is too expensive, especially in urban areas. But is the alternative hereditary building right good?

In times when building plots are not only becoming rarer but also increasingly expensive, private builders are increasingly considering alternatives to buying plots of land. One of them is the heritable building right, in which one's own property is built on a plot of land that has been leased for several decades. The model offers advantages and disadvantages that those who are undecided should carefully weigh against each other.

The concrete structure of heritable building rights is regulated by the nationwide heritable building law (ErbbauRG). The basic idea is simple: an owner leases the property that belongs to him to the client, the so-called leaseholder. This pays the so-called leasehold rent for the use of the property and in return may build a property on the land of the owner.

The contract concluded between the owner and the leaseholder regulates how long the heritable building right applies. In practice it is often 99 years. At the end of this agreed lease period, the property of the building erected on the property becomes the property of the property owner.

If the leaseholder does not meet the specified contractual obligations, the property owner can also make use of the so-called reversion claim before the end of the agreed period. "The property owner can then request the transfer of the heritable building right to himself and the surrender of the property," says lawyer Natalie Kaestner from the working group on construction and real estate law in the German Lawyers' Association. This can be the case, for example, if at least two annual payments of ground rent are delayed.

The advantage of a heritable building right for builders is obvious: Because the purchase and the associated financing of your own building plot are no longer necessary. Builders who are thinking about the alternative hereditary building right should compare in individual cases whether the hereditary building right is cheaper than financing their own property, advises the Bavarian consumer advice center.

The heritable building law protects those entitled to heritable building rights for the entire lease period, provided that the agreed interest is paid on time. Lawyer Kaestner says that even if the property is foreclosed on, the right to build and the property that has been built will remain unaffected.

Leaseholders can freely dispose of the property as long as they do not let it be neglected. However, as with other contracts, the exact conditions are freely agreed between property owners and tenants. The agreements depended heavily on the wishes of the contracting parties, says Jörg Kosziol, board member of the Munich building association. However, the greater the desire for flexibility, the more likely financing is to be preferred to building leases.

But heritable building rights also have pitfalls. For example, the right expires after the agreed time and the property and the property built on it pass into the possession of the owner. The latter is obliged to compensate the previous leaseholder for taking over the property. However, he does not have to pay more than two thirds of the market value of the property.

According to the Bavarian consumer advice center, this can lead to noticeable losses compared to a conventional real estate sale, especially in metropolitan areas. The banks also knew this and therefore tended to offer poorer financing conditions for building leases. The following applies: the shorter the remaining term of the right, the further the willingness to finance decreases and the higher the interest rate.

Leaseholders, as owners of the property, basically have sole power of disposal over the building, says Kosziol. However, if you decide to sell, the heritable building right on the property usually reduces the sales value considerably. Leasehold rights are valued based on the provisions of the Valuation Act with fixed discount factors over the remaining term.

In addition, the ground rent can also be increased during the term. That's why Merten Larisch from the Bavarian consumer center advises caution even if the dream of owning your own home only seems tangible with the help of a heritable building right.

Whether the heritable building right is really an alternative to buying a piece of land, everyone has to evaluate for themselves on a case-by-case basis. The advantages and disadvantages can hardly be weighed up for the general public.