‘How will buying in a retirement community impact the estate I leave?’

Q: My question relates to the amount of fees, charges and impact on any capital gains that over-50s villages retain on the sale of a property. I realise that many villages have differing calculation methods but is there a common thread amongst the majority of villages? Are there specific government regulations that determine retained amounts?

My greatest concern is the erosion of capital available to my dependants. There are many horror stories regarding the amount of funds retained by some villages and it is vital to be able to separate fact from fiction. A clearer explanation would be invaluable.

A: Your question has a number of components, so let’s start with the fundamentals. When people talk about ‘retirement communities’ they are often bunching together retirement villages and land-lease communities. The two models typically offer a similar lifestyle but have quite different legal and financial considerations.

In a retirement village, your contract is often a leasehold or licence arrangement that gives you the right to occupy the dwelling and use the common facilities. In a land-lease community, you purchase the dwelling and lease the land on which it sits and you also have the right to use the common facilities.

When it comes to crunching the numbers, you are spot on in saying that they vary from one to another. That’s why I find it easiest to break down the numbers into the ingoing, the ongoing and the outgoing.

You can easily create your own version of this breakdown just by drawing up a few columns, as I’ve shown below. Plus, you can find other exercises that help you compare downsizing accommodation options in the free Downsizing Essentials e-guide I created with Starts at 60 (you can download the e-guide here) and in my book with Noel Whittaker, Downsizing Made Simple, that’s available at a discount for Starts at 60’s members.

Here’s how I would break down the costs of the retirement village and land-lease community options.

Ingoing costs

The purchase price for your right to occupy your unit in a retirement village is often called an entry contribution. From an Age Pension perspective, this will determine your homeowner status and eligibility for Rent Assistance; if your entry contribution is below $214,500 you are considered a non-homeowner and can be eligible for Rent Assistance.

In a land-lease community, the ingoing cost is the price you pay to buy your home and have a leasehold over the land. That means you are always a homeowner for pension purposes but remain eligible for Rent Assistance due to the fact that you lease the land on which your home sits.

There may be other fees to factor into your ingoing bucket, such as contract preparation fees or stamp duty, if you are looking at a retirement village that operates on strata title.

Ongoing costs

In both a retirement village and a land lease community, residents pay a weekly or monthly fee to cover the running of the community and its facilities, as well as rates and insurances.

In a retirement village, this is often called a ‘general service charge’ or ‘recurrent charge’. In a land-lease community it is called ‘site fees’.

The ongoing fee changed by a retirement village operates a bit like a body corporate in an apartment building or townhouse complex, in that the costs of the village are apportioned across the homes on a cost-recovery basis.

But in a land-lease community the operator of the community is able to make a profit from the ongoing fees, so it is not uncommon for the site fees in a land-lease community to be higher than the general service charge of a retirement village.

Outgoing costs

Generally speaking, whether you are selling a home in a retirement village or a land-lease community, you are likely to incur fees such as agent’s fees and marketing expenses and the cost of repairs or improvements to your home.

But where you are likely to find the biggest difference is in the ‘exit fee’ charged by most retirement villages and some land-lease communities.

Exit fees are typically set at between 25 per cent and 35 per cent of either your original purchase price or the re-sale price and may also include sharing any capital gain or loss with the operator.

Many people regard the exit fee as ‘rip-off’ but it is important to understand what it represents so you can work out if it is worth it. As I said earlier, retirement villages must charge their ongoing fees on a cost-recovery basis – in other words, without profit – and they also typically want to keep the purchase price of their units affordable. So to make up for the fact that are keeping the upfront purchase price artificially low and not profiting while the resident lives in their community, they charge an exit fee.

The bottom line is that there is a lot of variation from one village to another on exit fees and even within a village itself, with lots of villages now offering different payment options.

That’s why you need to crunch the numbers on what the different arrangements mean for you, take into consideration how much money you will have to enjoy, what the ongoing costs will be, how much pension and Rent Assistance you will be eligible for and not just how much you will get back at the end but also when. That’s because some contracts will give you a guaranteed buy-back of your dwelling if it fails to sell in as little as 60 days, while others will offer the legislated buy-back after 18 months on the market or have no buy-back offer at all.

Crunch the numbers and make sure you look at your contract from three different angles: your rights, your responsibilities and your costs (there’s an explanation of how to do this in the free Downsizing Essentials e-guide and in the discounted copies of Downsizing Made Simple). And I can’t stress how valuable it can be to seek advice from a retirement living and aged care specialist.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.