26 May 2015
As more and more Australians move into retirement, increasingly they are reflecting on their accommodation needs in the years ahead, and buying into a retirement village becomes a real option for many.
Retirement village operators across the country are increasingly extolling the advantages of retirement village living for older (and these days not so older retired) Australians, but when considering the move, you need to weigh up both the advantages and implications of retirement village living, particularly financial ones.
Peter Hill, Honorary Solicitor to the NSW Retirement Village Residents Association (RVRA), shares six of the most important considerations below.
1. Moving from home-ownership to tenancy
It is often the case that the resident does not own the property, increasingly these constitute a long-term lease or licence to occupy.
Residents are often not purchasing ‘bricks and mortar’ in a traditional sense, but really a quality of life that goes beyond their accommodation. In reality, many residents move from owning their own home to becoming a tenant or licensee in a village.
2. Providing the ingoing contribution
Residents usually pay quite a large sum upfront (referred to as an ingoing contribution) for the right to occupy – in many villages this can be the same price as for a townhouse or strata apartment (within the framework of a retirement village).
This money is often characterised as an interest free loan to the operator, but bear in mind it is unsecured and when the operator becomes insolvent, there can be legal challenges for residents to retrieve their money if they wish to move out.
3. Paying recurring charges
Residents pay monthly recurrent charges to the operator and these are a significant area of dispute in NSW in some established villages.
Most of the disputes are over increases year-on-year and the quality of services being offered for the fees. These fees in some villages are required to continue to be paid after the resident has left and in some cases, up until the sale proceeds have been received.
4. Leaving the village
Residents need to understand that when they wish to move from the village, there are financial implications. This is one of the biggest complained about areas of the industry and is often not well explained or understood.
Operators make their money generally at the end of the tenancy or accommodation term. Significantly, residents will pay a departure fee to the operator. Usually this is a percentage that accrues over a period of time, and in some villages, is based on the sale price of the unit, not the price paid to originally move in (by way of example, could be 6% p.a. capped at five years equalling 30% of the sale price).
Some operators take a percentage of the capital gain (the difference in price to what you pay and what the apartment is later sold for) and they all charge a sales commission to sell the unit in the future.
These costs all add up and can be quite significant amounts when a resident is leaving, and particularly if they need to maximise their money to fund higher levels of care. Usually, monies are not returned to the resident until the apartment is sold and the incoming resident has paid the money.
5. Covering capital replacements
In villages with ageing infrastructure, there are increasing disputes with residents over replacement of capital items. In NSW, operators are required to foot the cost of capital replacement (the idea being that the departure fee is meant in part to compensate operators for this cost). But some continue to constantly repair items of capital and charge residents through their recurrent charges, rather than replace the item at their cost.
In short, obtain a building report – at least over the apartment or unit you are considering living in, before entry and payment of money.
6. Doing the maths
Finally, I always advise clients to ‘do their math’ of either staying in their own home and buying in services as they go (rather than paying for all of these in a village and only using some) versus purchasing a small freehold unit or townhouse if available. In the case of the latter, they also do not face the often hefty operator charges at the end.
Forewarned is forearmed as they say, and please don’t hesitate to discuss your options with your Financial Adviser.
Peter Hill, Practice Manager at Hill&Co Laywers, has been the Honorary solicitor for several years now to the NSW RVRA, the association in NSW that represents residents in retirement villages. He has offices on the Central Coast and at Pymble and advises clients in NSW considering the move to a retirement village.