Think Twice Before You Agree to a Deferred Management Fee

Considering a retirement village lifestyle? Be sure to read the fine print. Some retirement villages charge a departure fee – also known as a deferred management fee or exit fee – and this can end up costing you (and your family) a lot more than you think in the long run.

You may have heard of departure fees, but there’s a good chance you’re not sure exactly what they are, and what it will end up costing you if you agree to them.

So what exactly are departure fees, why are they charged – and do you have to pay them?

What are Departure Fees?

A departure fee is the amount a retirement village operator charges a resident when they sell their home and vacate the village. It’s pitched to potential buyers as a way to keep the initial purchase price down, with the buyer agreeing to pay the village operator a percentage of the sale cost when the home is sold. But well-known financial journalist Alan Kohler disagrees, saying “deferred fees are where you buy a unit in a retirement village at full price, but when the time comes to sell you have to pay the village owner a large percentage of what you get.”

But not all village operators take this approach. Brian Mulcahy is a retired solicitor and one of the Directors of Traralgon’s Village Lifestyle Park. Mulcahy says his park chose not to charge a departure fee because they simply didn’t need to. He describes the fees as “super profits for operators, but a poor idea for residents.”

What Departure Fees Cost You, the Resident

The departure fee is written into the lease agreement and is calculated on a percentage scale. Some operators charge a departure fee, a contribution to the maintenance fund fee and an administration fee. No matter what name these fees go by, they are almost always payable by the resident on departure from the village. If you are contracted to pay these fees, they can add up to 32.5% of the sale price.

So if the ingoing resident is paying you $220,000, you’ll be handing over $71,500 to the operator of the retirement village. This figure is on top of all the ongoing fees you’ve paid over the duration of your stay, so in the end you will most likely come out of your investment well and truly in the red. Additionally, the new resident of your home may also be required to pay a significant contribution to the long term maintenance fund, which can be 0.5% per annum, for up to 10 years.

What Impact Can They Have?

Most retirees don’t realise just how much departure fees can cost them, and get a nasty shock when they find out. Contracts are lengthy and difficult to understand, and many residents suffer a great deal of stress when they are ready to sell and find out that a large chunk of their profits are not theirs after all. In addition to this, the difficult contracts frighten many potential buyers off, as they need solicitors to make sense of them, which means you may struggle to find a new resident for your home. For residents who are contracted to pay departure fees, if there is no “next resident” you are effectively stuck. You will still be required to pay the relevant fees and costs associated with living in the home, until you have found a buyer.

Many residents become anxious and depressed about the payment of such a large fee and feel trapped, as remaining in the village is often the best way of deferring the payment of the fee. Even retired Supreme Court Judge Fred Myers was surprised and angered when he discovered just what his retirement village contract involved. He and fellow residents felt they had been misled and actively lobbied the government and Consumer Affairs to take action – but to no avail.

The Burden Doesn’t End There

A big problem with departure fees is that they’re not terminated when you sell your home – they are passed on to the next buyer. This is great for the village operators, as they are guaranteed another cut of the purchase price the next time the property sells – but it’s not good for you, because you need to find a buyer who is willing to take on the burden of the departure fees, and this is not always an easy task. It’s a lot like a game of pass the parcel where you can end up stuck with a property that has an unfair burden attached.

Plus, in addition to the departure fees, you’ll also need to keep paying rent on your land until a buyer is found, which can add a huge amount of additional costs if the sales process is not a fast one.

Cost Comparison: Departure Fee vs non-Departure Fee Contracts

Here’s an example of how departure fee vs non-departure fee contracts compare on two properties of the same value:

	No Departure Fee	Departure Fee
Entry Price	$225,000	$225,000
Length of Stay	10 years	10 years
Departure Fee	0%	25%
Maintenance Fee	0%	5%
Administration Fee	0%	2.5%
Sale Price (In 10 Years)	$349,049	$349,049
Exit Fee Payable on Sale Price	$0	$113,441
Return to Resident	$349,049	$235,608

 Departure fees are essentially super profits payable by residents to some retirement village operators – the operator sells the home at a profit, then makes a profit on the annual fees and finally makes a super profit when the resident sells their home.

Before You Buy, Know What You’ve Signed Up For

Anybody considering purchasing a home in a retirement village and agreeing to pay departure fees should make sure they fully understand how the fees are calculated and how much they could potentially cost. It can be incredibly stressful for retirees and their families to discover that when they sell their home, a large percentage of the profits must be handed over to the operators.

Departure fees can detract from the quality of life retirement village residents enjoy and significantly reduce their net worth – which eventually leads to a reduced inheritance for their children and families.

Thankfully, it is possible to find a retirement village with a simple transparent arrangement, which does not require a lawyer to interpret the contract. When you understand exactly what a departure fee will cost you in the long run, and know that you can choose a village that does not charge the fee, it will help you make an informed decision – which means you can fully enjoy all the retirement lifestyle has to offer.

Want to know more about deferred management fees and other traps related to lifestyle villages? Download our FREE guide, 20 Questions You Must Ask BEFORE Choosing a Village.