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Are the criticisms of retirement villages justified?

If you believed everything you heard about retirement villages lately, it would be easy to conclude that these facilities should be avoided, due to the likely detrimental effects on your financial circumstances and health.

If you are more of a critical thinker or have experience with the industry, you are probably shaking your head. People tell stories of signing contracts they did not understand, not seeking legal or financial advice or worse, receiving advice that did not completely inform them about contracts and costs.

Tips for entering retirement villages

Retirement village contracts are a balance of rights, responsibilities and costs. They can be complicated and advice should be mandatory. Here are some tips and traps on what to expect.

Importantly, if you are their adviser your role is not to 'weigh the scale' on the value of the transaction but to highlight the costs, rights and responsibilities and allow clients to make an informed decision.

Watch the Retirement Villages Act

Firstly, retirement villages operate under state (or territory) legislation, typically the Retirement Villages Act, which prescribes what is and is not a retirement village, who can be a resident (typically there is a minimum age of 55) and the legal documents that are required, commonly contracts and disclosure documents. It also regulates some but not all of the financial arrangements. Typically, retirement villages are not allowed to profit from running the village.

Under the contract, the ownership (or right to occupy) a home in a retirement village is often a leasehold or licence but in some cases, it is Strata Title or even a company share or unit trust arrangement. Many people have a natural inclination to want a Strata Title because of the rights and control that relate to the ownership model as well as being familiar with an ownership model.

This is a good example of how retirement village contracts can be different from contracts in other industries and it emphasises the need for advice on the correct balance of rights and responsibilities.

In a Strata Title village, the perception of ‘ownership’ is probably different to the reality. In most cases the resident may have a copy of the title or may hold the title but with a caveat against it, to restrict sale to people who are not eligible to live in the village and to ensure that the exit fee is paid.

Strata villages certainly give residents a say in the running of the village, as residents are part of the owner’s corporation. But this also comes with the responsibility to keep up this involvement for your entire stay. Just like any other strata complex, owners are responsible for the owner’s corporation fees until their unit sells.

In states that have a guaranteed buyback or payment when someone moves into aged care, these often do not apply to a Strata Title village.

Let’s be clear. I don’t believe strata villages are bad, I am saying that retirement village contracts are different to similar contracts in the ‘real world’ and people need to look past what they think they want and assess the contracts on their merits. The contract should strike the right balance of costs, rights and responsibilities for the individual.

Break down the different costs

To analyse and compare different villages, break the costs of the transaction into three parts: Ingoing, Ongoing and Outgoing.

Ingoing - the amount someone pays for their home (or right to occupy a home) in the village plus transaction costs such as stamp duty or contract preparation fees.

Ongoing - the costs to live in the village, often called the general service charge or recurrent charge. A budget should also be done for personal expenses. In most retirement villages people are levied for utilities, which are individually metered. Then there are everyday expenses such as groceries, maintaining a car, entertainment and travel. In addition, there may be the cost of care through a Home Care Package, private carers or a combination of two.

Outgoing - the amount people pay when they leave the village or the home is sold. The Deferred Management Fee, which is commonly between 25% and 40% of either the purchase price or sales price, is normally the biggest cost. But there can also be a share of capital gain (or loss), reinstatement or refurbishment costs and sales and marketing fees.

Important consequences to consider

Moving to a retirement village can have wide-ranging consequences on personal finances, so watch the following:

  • Impact on pension entitlement and eligibility for rent assistance
  • Cost of a Home Care Package.
  • Ability to afford living in the community, and
  • The amount of money that will be received when the unit is sold or the amount paid under a guaranteed buyback and how quickly this will occur.

These factors will impact the long-term asset position, which affects the cost of the next move, into aged care. Crunching the numbers and understanding rights and responsibilities throughout the transaction can be complicated, but it is essential to ensure there are no surprises later.

If there is a lesson in the current media hype it is this: the right legal and financial advice is valuable for consumers and retirement village operators.

 

Rachel Lane MFP is Principal of Aged Care Gurus. See www.agedcaregurus.com.au. This article is general information and does not consider the circumstances of any individual.

5 Comments
Gideon
December 24, 2018

My wife and I are investigating Retirement Villages: about 8 to date. Its correct to say buying into one is NOT an investment you lose for example on a $400,000 unit/ home when exiting $133,000. What you save upon entrance is lost upon exit: swings and 'roundabouts.' However it often suits folk to save the $'s through the cheaper [than alternatives] entrance purchase; it'll be the offspring that reap what's left anyway!

Mr HILTON CONROY
December 10, 2018

I live in a retirement village.
My monthly expenses are cheaper than my costs when i lived outside the village in my own home. I lease here for 49 years and have most things looked after by the village staff. Typically the front garden and lawn is looked after by the operator and our villa has recently been painted. Inside the house is my responsibility. I have no concerns about broken roof tiles etc. The village has a great social life and facilities like pool and spa etc. So little to worry about. But for this I will pay the Exit fees and half of the capital gain when I leave. We do get a say in matters here and we have a residents committee. Be aware of both the costs and the great benefits of the village lifestyle. Nothing is free in this world. Never see it as an investment, but a better more secure way to live in the senior years.

Les Scobie
August 31, 2017

Whilst this phrase 'Going into a Retirement Village is a lifestyle decision, not a financial one' is well used even by Consumer Affairs Victoria it is misleading to say it is not a financial one. Any decision where the value of your capital base can be decimated over both the short term and the longer term by entry into a retirement village most certainly requires a financial decision. Prospective residents ignore it at their peril.

Alan CLARK
August 28, 2017

A very well written and easy to understand summary of the strata-titled Retirement Village that I have been managing for the past 3 years. My sanity became more important to me and my family so I decided that 3 years was enough and moved back into main-stream property management; from whence I came.
In my personal day-to-day experience there is much blame to put onto the prospective retirees Solicitors/Lawyers shoulders as well as the Conveyancing Agent whom handles their freehold purchase into a strata-titled Retirement Village.
They might understand the principal of that freehold ownership model, but arrive with many, many incorrect ideas about what they are coming into and the overall costs involved - and then spend every available opportunity to whinge & gossip abou what they then perceive as "rip-offs" when clear and proper advice in the first place would have gone along way to negate that view.
My advice is - get heaps of legal advice and think about this important step BEFORE you do it.
Many Retirement Villages are classified as "independent living" yet many retirees believe that if they fall over or require medical assistance that village staff will be able to help them. This is not so. As many retirees are moving to Retirement Villages at an older age (our average age was around 80 with quite a few in their 90's) they should seriously look at skipping this step and consider looking at full-time care in a nursing home.
An 'independent living' Retirement Village usually offers no medical support, no home doctor service and the staff are schooled that they must not even help to pick up a fallen resident if they have a fall. I started the practice of changing light bulbs for older residents (but they had to supply the globe) but many villages will simply pass on the details of an electrician and do not have the staff to offer any such service.
Get plenty of advice prior to purchasing and fully think it through.
Going into a Retirement Village is a lifestyle decision, not a financial one !!

Adrian Harrington
August 24, 2017

Thanks Rachel - you are correct. "The right legal and financial advice is valuable for consumers and retirement village operators."

As part of the evolution and growing sophistication of the retirement living sector, residents are becoming more proactive and vocal at times when their expectations are not being met. The recent media attention has seen calls for regulatory reviews and greater consumer protections.

The industry, via the Retirement Living Council, of which Folkestone is a member, has responded proactively with a detailed policy plan to deliver higher standards, clearer and simpler information about costs and contracts, and better dispute resolution mechanisms. Folkestone actively participated in the development of this plan, and is a signatory to it.

The industry knows from independent surveys and resident feedback that a clear majority of residents are enjoying the retirement living community lifestyle and the advantages it provides. However, there are improvements that operators can make, to ensure that residents have complete certainty about their contract, including what they’re paying for, exactly how much they’re paying and when they’re paying for it. It is in everybody’s interests to lift the professional standards, transparency and confidence in the sector and we believe that the media scrutiny and regulatory reviews will help achieve these outcomes.

One thing is assured - the number of people over 65 is expected to increase significantly in the next few decades. Having appropriate accommodation that offers a high level of service (including home care) is critical not just for older people but also the government who wants to see more people ageing in place.

 

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