The stories of people moving into a retirement community and suffering buyer regret years later when they realise what they get back have been well told. The ABC’s 7.30 programme highlighted the issue again recently with a story about children who had seemingly done the right thing and read the agreement yet were shocked at the actual cost when their mother’s unit was sold six years later and the retirement village operator received circa $76,000.
Such stories also contribute to the other type of buyer regret – people who wish they had made the move sooner.
Understand the arrangements before you move
No matter which type of regret, it is too late to do anything about it now. You can’t wind back the clock and move into the village sooner and if you are at the point of leaving the village it is too late to negotiate a different financial arrangement. What they needed was to identify the village or villages that would meet their lifestyle needs and have the legal and financial aspects explained to them well before they moved in.
Of course, that’s easier said than done as many of the legal and financial arrangements are complicated.
Let’s start at the start.
Retirement communities can be broadly grouped into Retirement Villages and Over 55 Communities (sometimes called Manufactured Home Parks). Retirement Villages operate under the relevant state or territory legislation, often The Retirement Villages Act, which sets age requirements and deals with some but not all financial arrangements. A small number operate under residential tenancy laws. Over 55’s, on the other hand, operate under caravan park or residential tenancies arrangements or a combination of the two.
The legal contract for a Retirement Village unit can take a number of forms, from strata title to the more common leasehold and licence arrangements. In some cases, company share and unit trust arrangements give the right to occupy a unit in exchange for the purchase of shares in a company or units in a trust. In an Over 55’s community, the contract is over the land rather than the unit - the purchaser owns the unit and has a leasehold or lease over the land. Of course, there is a big difference between having a 12 month lease and having a 99 year leasehold arrangement. It also creates the interesting situation of being a homeowner and a tenant at exactly the same time.
Costs associated with different structures
Whether the person lives in a Retirement Village or an Over 55’s community, the form of legal ownership will dictate their rights and responsibilities in relation to their unit and the costs associated with it while they live in the community and after they leave - so it’s important to understand.
The costs can be broken down into the ingoing, the ongoing and the outgoing.
The ingoing is the amount the person pays for their right to occupy their unit together with other costs such as contract preparation fees or stamp duty.
The ongoing costs will include the expenses associated with the facilities and management of the community. In a Retirement Village, these are often called general service charges or recurrent charges and in Over 55 communities they are known as site fees as well as the resident’s own personal expenses. In many retirement communities the operator delivers (or engages with external providers to deliver) extra services, such as domestic help, meals and in some cases, care. These services are normally offered on a user pays basis and are in addition to the other costs. Residents are normally responsible for their own utilities as well. Making a budget that incorporates all the costs including pension entitlements, rent assistance and other income is a good idea.
The cost of leaving a retirement community normally causes the greatest confusion. There are many different exit fee models, most based on either the purchase price or the sale price and are for a percentage multiplied by the number of years the resident stays in the village. A common model historically has been 3% per year for 10 years based on the sale price. In more recent times, exit fee models have tended to be higher, and anywhere between 35% and 45% is not uncommon.
What many people fail to appreciate is that there is more to the exit fee calculation than just the percentage-based cost, often referred to as the Deferred Management Fee or DMF. There can be sales commissions to the village or to an agent and refurbishment costs to bring the unit up to the current standard within the village. Understanding all of the fees and charges and putting them into dollar terms is important, although it often involves the imperfect science of predicting how long the resident will live in the village and what their unit will be worth when they sell.
The Retirement Living Handbook
To help people navigate the maze and avoid some of the traps, Noel Whittaker and I have teamed up again to write The Retirement Living Handbook. It covers the important aspects of moving to a retirement community from finding the right retirement community to the different forms of legal contract and financial arrangements through to the impacts on pension entitlement and eligibility for rent assistance. There’s more than a dozen case studies from Australian retirement communities so you can see how the theory plays out in practice.
We will be hosting a book launch in Sydney on Monday 19 October 2015 and would like to extend a personal invitation to Cuffelinks readers to attend. The event will be held at 2pm at Club Central, 2 Crofts Ave in Hurstville. Noel and I will be sharing our top tips and you can have your copy of the book signed. To rsvp call 1300 855 770.
Rachel Lane is the Principal of Aged Care Gurus and oversees a national network of financial advisers specialising in aged care. This article is for general educational purposes and does not address anyone’s specific needs.