The purchase of a Retirement Village unit is a very different process from purchasing a standard house or unit.
The key difference is the way in which the ownership of the unit is held by the Retirement Village operator. despite the incoming contribution (the amount paid), generally being the actual price of the unit. Retirement Village operators generally sell, well they don’t actually sell, their units through a loan lease arrangement
A loan lease arrangement is where you loan money to the retirement village operator who holds the title and freehold to the unit, while you lease it back from them. Sounds complicated, well it can be. Fortunately the Retirement Village Act and particularly amendments made in 2006 make it fairer, more transparent and somewhat easier to understand.
Never forget that retirement village operators are generally large corporations that are in the business to make as much money as they possibly can for their shareholders. It is no community service. Notwithstanding this, there are a variety of operators in the marketplace and therefore costs of entry are subject to competition between operators, which keeps prices down.
The Retirement Village will request from you an incoming contribution, which is the amount you lend to the Retirement Village operator to be granted a Lease to a Unit,.
The Operator then charges you a deferred management fee. This is where for a fixed period, generally 10 to 15 years, a fixed percentage, often around 3%, is deducted from any repayment of the entry cost. Some operators have a large percentage in the first year and less thereafter, while some maintain the same percentage amount all the way through.
Let’s say you pay $500,000.00 for a unit through a loan lease arrangement. The Deferred Management Fee is 8% in the first year and 3% for the next nine years thereafter. If you left after one year you would receive back the selling price of the unit say $550,000.00 minus 8% of the selling price. If you left after 3 years you would receive back the selling price, let’s say $650,000.00 minus approximately 14% off the selling price without considering any compounding.
There are also refurbishment costs of the unit and agents selling commission, which are generally deducted from the incoming contribution. The delay in finding a new incoming resident to fill your unit may also cause delays in receiving back the incoming contribution, after it has had any capital gains added and the fees deducted.
Some Retirement Village Operators allow you to keep 100% of the capital gain, some may take 50%. The capital gain is the difference between the purchase price and the selling price. However, where the retirement village operators say that they give back 100% of the capital gain, our opinion is that this is not correct. We think it is not correct because the deferred management fee is generally deducted from the end selling price, which includes capital gain.
Therefore, they are sharing in this capital gain to the extent of the deferred management fee percentage amount, which applies to any capital gain.
Once you are able to overcome the complexities with Retirement Village contracts you will realise that they are not an investment decision, but a lifestyle decision. Usually at this stage in your life that is the right decision. You can’t take your money with you when you pass. Retirement villages have several advantages, which can sometimes stem from some of the things that make them look bad.
One of the key things here is that you do not own the unit, you lease the unit. The lease sets out the rules and regulations of the village. If a resident consistently fails to keep to the rules and becomes problematic with other residents then they can be forced to leave in accordance with the conditions of the lease. Unlike any standard unit, this ensures that you should not have neighbours that play music late at night and other annoying things that would not be tolerated by the village, but may be experienced elsewhere.
The Village is set up in a way to accommodate for your needs as you get older, it ensures that you have very little to concern yourself with when it comes to maintaining your surroundings. It is generally a gated community where you can be with peers and get involved in the overall retirement village community, its facilities and programs.
The incoming contribution amounts vary from village to village and can become quite pricey depending on the area, the units and the facilities. Consideration also needs to be given to the ongoing costs of servicing the unit. the monthly charges will have to be paid. consequently you will require sufficient ongoing income to meet these ongoing fees.
Retirement Village operators are required by law to disclose their deferred management fees, which will be deducted at the end and any ongoing service fees to maintain the Unit and the surrounds. Careful attention should be given to the Disclosure Documents that contain this information.
Retirement Village operators will often set aside a Unit for you with a condition that you only take possession once you have settled on the sale of your house. In today’s real estate market this makes good sense for the Retirement Village operators. Providing you act reasonably to sell your property, you will have reasonable time to do this and to achieve a good price.
While it is always important to use a Legal Practitioner to handle your conveyancing, it is more important where you have entered into the purchase of a loan lease arrangement. This way we can handle both settlements and arrange them in way that you can often settle from one to other almost instantaneously.
If you live in the Outer East of Melbourne, the East of Melbourne, the south East of Melbourne or anywhere else in Melbourne, we can assist you with understanding your Retirement Village contract in detail. We can also deal with the Retirement Village operators on your behalf and make the whole complicated process seem simple and run smoothly for you.