Retirement villages can provide an appealing self-contained environment, physically and socially geared to the needs of retired people. It has been said that ‘retirement villages are not a financial investment, but rather an investment in a lifestyle’. There are certainly costs of a retirement village lifestyle and it is vital to be fully informed.
Retirement village contracts are diverse, with not-for-profit and private operators structuring their offer differently, however there are broadly four types of payments included in the contract.
The entry payment is the initial purchase price or “in-going contribution” for the resident’s right to occupy their dwelling in the village. This may be in the form of purchasing a strata-title unit, or as a long-term lease whereby the ownership remains with the operator. Prices are largely determined by the market.
This is a monthly service fee to cover day-to-day operating costs and the upkeep of the village. This is sometimes called a recurrent charge or maintenance fee. This levy is used to cover services such as monitoring the emergency response systems, maintaining recreational facilities and common areas including gardens and lawns, managing the village etc. The fees should reflect actual costs.
Deferred Management Fee (DMF)
Villages will also charge a Deferred Management Fee (DMF). This is one of the ways in which retirement villages make their profit. The DMF is deferred until after you sell your retirement property. It is usually expressed as an annual percentage of the entry payment. An annual fee of between 2.5% and 3.5% over a maximum of 10 years is typical however in some cases, there is no maximum accrual period.
- Capital Gains Sharing: Another way that the operators make a profit is by taking a share of any capital gains made when your residence is sold. In the private sector it is usual for 50% to be retained and in the not-for-profit sector up to 100%.
- Reselling Costs: The village operator may also act as the selling agent when it comes time for the residence to be sold. If this is the case, the operator will retain some of the selling price as commission.
- Refurbishment Costs: Following your departure from the residence, you may have a liability to cover some costs of refurbishment, limited to rectifying excessive wear and tear.
State regulations offer you some rights. Firstly, the operator must provide a disclosure statement at least 14 days before you enter into a contract. This is an important period within which you should have the contract reviewed by your lawyer prior to signing it.
Further, in NSW there is a cooling-off period of 7 business days after the signed contract is received by the village, within which you can cancel the transaction with no penalty. There is also a settling-in period, where you can cancel within 90 days of moving into the village.
We recommend you seek legal advice before signing a retirement village contract to ensure that it complies with the State regulations and that you fully understand your obligations and rights. For more advice please contact us on (02) 9908 9888.