We have had a lot of queries about our report last week on ‘like for like’ retirement village homes being 25 per cent to 50 per cent cheaper than the same homes in the same postcode – how could that be?
Many people said to us it must be because the “hidden fees” in the contracts are exorbitant – that is how village owners make their money: “Villages are just not a good deal.”
Well no, that is wrong. Villages are an exceptional deal, depending on what you want. And this is why many villages have waiting lists. In fact over 25,000 people this year will pay hundreds of thousands of dollars to join a village, having done their homework and knowing a good deal when they see it.
The real story behind ‘those fees’
But let’s look at those ‘hidden fees’. The one that journalists and families jump on is called the DMF, or Deferred Management Fee. It is a big one. Commonly it is 30 to 35 per cent of the price you pay to join the village.
Based on $500,000 to enter the village, when you leave you will get back around $325,000. The DMF will cost you $175,000 to live in the village. The average is nine years residency, so it will have cost you $19,500 a year or $375 a week.
You do not get the benefit of any capital gain from the value of the property either, like you would if you owned your own home.
Sounds like a terrible deal and the owner of the village must be making a fortune!
Well no. And before I explain why, it is worth noting that church and charity groups operate 40 per cent of all villages. The Catholics, Presbyterians, Lutherans and Salvation Army to name just a few. Do you think they are making a fortune off older Australians? And their villages are not necessarily the lower cost ones – $1 million village homes are available and selling.
The great attraction of retirement villages is that they are designed to give you the peace of mind that you are secure as you age. Physically secure and financially secure, with good companionship and emotional support on hand. They are likely to be your last move.
More money in your pocket
The money part is fundamental to security. So the village contract allows you to ‘buy’ your home at significantly less than a normal home outside the village and you can keep the difference to live on as you age.
What is more your village home will have safety designed into it that normal homes don’t, plus gardens, safe roads, swimming pools and facilities you would not get in a normal house or apartment.
You get the money and benefits now and pay later, with the DMF fee.
And the owner joins you. They get their profit from providing the village and support nine years later, when you leave. It is ‘delayed’ profit and is their reward for staying with you and being responsible for your welfare and the operation of the village – for nine years.
Do they make a lot of money out of this? No. The big public companies like Aveo and Stockland earn around 6 per cent return on their villages. They could almost have their money in the bank and be better off.
Residents protected by law
And are the contracts fair? All this information is very clearly spelt out and backed by the laws and regulations of the Retirement Village Act in each state to protect potential residents. It is your responsibility to read the contract and get advice – just like buying a house. Nothing unfair about that.
So why buy into a village? Well, what value do you place on peace of mind? On security? On contentment? On being able to do things now with your money while you can rather than locked up in your old home?
Nine years is a long time to be worried, and often alone. Villages offer an alternative. And to our mind that is close to priceless.