You've decided to downsize and take the step of moving into a retirement community. You love the lack of maintenance, social aspect and access to services. However, did you realise that you don't actually own your property?
Properties in retirement villages are often sold under loan licences. If you haven't heard of these, you're not alone. Many residents find out after the fact that the property they've purchased doesn't actually belong to them.
What is a loan licence?
A loan licence is a contribution or 'loan' (purchase price) to the village operator. In return, you are able to live in the property. The benefit of having a loan licence is that it is the responsibility of the village operator to insure your property, but there are negatives as well.
What other costs will I need to pay?
Under a loan licence, maintenance and management costs are still incurred by residents, usually in the form of a monthly payment. You will probably also be accountable for any utility bills such as water, gas and electricity.
Additional services offered within the village such as meals, social outings and cleaning are also likely to have fees attached.
The important thing to know and what many residents are unaware of, is how much you will need to pay should you decide to sell. If you decide on a sea change or would like a more supportive form of accommodation as you age, it can be quite expensive to leave your current living arrangement behind.
Selling must generally take place through the village operator - with all marketing costs (website, brochures, advertisements, etc) passed onto the resident.
As part of the sale process, your village operator may ask you to pay for refurbishment. This can involve minor updates to the property or an extensive overhaul to modernise it for the market.
The next hit you may take to your finances is known as 'deferred fees' and these can be quite substantial. A deferred management fee (DMF) is calculated when you vacate the premises. The DMF figure is generally calculated using a formula that takes into account your initial purchase price, that of the person you're selling to, and the amount of time you've lived in the property. Any capital gain when you sell - either a contribution or the full amount - will also need to be paid to your village operator, if that is what the contract stipulates.
Crucially, you should know that regardless of whether you're living in the property, you are still responsible for all ongoing and one-off costs. This is applicable even if you pass away, with the responsibility transferring to your family until the sale is complete (except for exceptions under the Retirement Village Act). It can be an unexpected financial burden at a time when your family is grieving, particularly when a property doesn't sell quickly.
In an incident a few years ago, a retirement village in Victoria had an open day for prospective residents. The effects of the glossy brochure handed out by the village operator was somewhat hampered by a disgruntled resident handing out her own brochure on the potential pitfalls including ongoing fees and the charges incurred when residents moved out or died.
Do your homework
The big lesson to take away from this is that you should always do your homework. There are many benefits to choosing to live in a retirement village but on the flipside, contracts can be convoluted and can contain costs you may not be aware of.
Taking the time to seek legal advice for yourself or a loved one can save time, money and regret in the long run. While these fees are fairly standard in the industry, there are ways to save yourself money - for instance, does your village operator place a timeframe around how long you may need to pay ongoing costs while trying to sell? Some put a deadline in place which creates some certainty up front about the charges you will incur if the property market is sluggish. Another thing to look at would be the amount of capital gain your village operator will take from the sale.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.