Without a doubt the greatest confusion when it comes to Retirement Village costs is the Exit Fee. Many people view it as a “rip off”, but the exit fee is directly related to how much you pay upfront and the cost of living in the village. You see the exit fee enables the village to keep their purchase price lower so part of the reason for the exit fee is to pay what you didn’t pay upfront. The other part is to compensate the operator for managing the village at cost while you live. Many people don’t realise it but Retirement Villages are not allowed to profit from the ongoing weekly or monthly service charges.
Now that you know what the exit fee is for, let’s talk about how to calculate how much you will pay with those two pieces of information you can work out whether or not it represents good bang for your buck.
Since most residents live in a retirement village for around 9 years, let’s calculate the exit fee based on you living there for 10 years.
Step 1 – Start with the Deferred Management Fee (DMF)
The Deferred Management Fee or DMF is typically the biggest part of the exit fee, although it is possible to find villages that allow you to pay an Upfront Management Fee (often at a discount) or even no management fee (with a higher purchase price).
When it comes to DMF’s the industry norm is around 30% and on average it accumulates over the first 5 or 6 years that you live in the village.
So the first step is to find out how much the DMF is and what it is based on – is it the purchase price, the sale price or a fixed amount?
If it’s a fixed amount or it is based on the purchase price then you know exactly how much it will be simply be multiplying the amount you paid by the percentage. For example, if the DMF is 5% per year for 6 years then after 10 years your DMF will be 30%. If your purchase price is $400,000 this means your DMF will be $120,000
If your DMF is based on the sale price then you will need to guesstimate what the value of your unit will be when you leave. You can do this by applying a growth rate, my tip here would be to be conservative and use say 2%p.a or 3%p.a. So a unit worth $400,000 today, assuming a 2% capital growth rate would be worth $487,600 in 10 years’ time. If your DMF is 30% of the sale price this means your DMF would be $146,280.
Step 2 – Add or subtract any share of capital gain or loss
The calculation of your exit fee may include receiving some (or all) of the capital gain or loss with the operator. The share is not always the same, for example you may receive half of the capital gain but all of the capital loss. Many Australians believe that property always goes up, but that’s often because they have only sold properties they have held for a long time, in reality property prices can fluctuate a lot. If you are doing the sums on a contract with capital gain and loss my tip would be to be conservative with any assumed growth rate.
Step 3 – Add any refurbishment or renovation costs
As a general rule if you have a contract that gives you some or all of the capital gain then you will typically need to meet some or all of the costs associate with achieving that gain, which often means renovations.
If you have lived in the village for 10 years then the renovations to bring your unit up to the standard of other units at that time could be substantial, i.e new bathrooms, kitchen and floor coverings.
If your contract doesn’t give you any capital gain then typically you will find that you are responsible for what’s often called “reinstatement”, which is basically like saying “put it back to the way the way you found it”. It often involves some relatively minor works like repairing any damage and removing any alterations you have made.
Step 4 – Add any marketing fees
Like any property sale you need to find a buyer, while some retirement villages will have a waiting list of people they can contact in most cases your unit will need to be advertised on multiple websites and you may need to cover costs such as professional photography and furniture styling which all costs money.
Step 5 – Add any Selling Costs or Sales Commission
Just like other property transactions there can be costs associated with selling your home in the village like legal fees, administration fees and commission for the sales person.
Last but not least, look at the buyback period
The buyback period is not a cost, rather it is something that could save you money in the event that your home in the village doesn’t sell in a timely fashion. State-based legislation sets out the conditions and timeframes for buybacks which vary from no buyback through to 18 months. While the legislation sets the maximum timeframe for buybacks it is not uncommon to find villages, particularly those run by large operators, that will offer you a buyback in a shorter period of time or when a buyback is not required. It can be as short as 3 months in a state where no buyback is required. If your next move is to aged care getting your money back sooner could save you thousands.
There is a lot to think about when you are moving to a retirement village, and for most people what happens after they leave is furthest from their mind. But it’s definitely worth crunching the numbers.
You can ask the village to provide you with a Village Guru Report which will crunch the numbers on the village costs Ingoing, Ongoing and Outgoing and provide you with an estimate of your Age Pension, Rent Assistance and Home Care Package fees. It’s great information, but it’s not financial advice.
It’s a good idea to get advice from a Retirement Living and Aged Care Specialist® on all of the financial implications of downsizing and strategies that can make it more affordable.
*The information contained in this article is general in nature and does not take into account any person’s individual objectives, financial situation or needs. It is not intended to imply any recommendation, opinion or advice. You should seek advice from a qualified professional about your particular financial situation, needs and objectives.