There are so many critics of the Deferred Management Fee (DMF, or exit fee) based retirement village contract that one might assume that nobody in their right mind would ever enter into one. And yet most of the critics are residents of villages who have done just that – signed a village contract.
It begs the question: why do so many people sign a contract they say they don’t agree with?
With 20,000 intelligent couples and individuals buying a village home each year with a DMF contract, backed up by legislated information, you have to assume the DMF is acceptable at the time of purchase.
Research tells us this is the case. But it also tells us that opinions change over time.
The McCrindle Baynes survey of 10,500 village residents in 2011 found 97 per cent of people, when buying into their village, found the purchasing model ‘reasonable’ to ‘very suitable’. Only three per cent said it was ‘not at all reasonable’.
So they were happy with the contract at the time of going in.
Opinions change with time
However after being a resident for a number of years, just 19 per cent thought the DMF was ‘reasonable’. In fact 37 per cent thought it ‘unreasonable’, while 26 per cent said they didn’t understand it. (Others said they didn’t have an opinion because it didn’t affect them).
The picture that emerges is that, as time goes by in the village, people either forget their own original rationale for joining the village and why the financial arrangements were then acceptable; or perhaps they were not involved in the process (for example, if a now deceased partner did all the contract review).
Clearly village operators need to do more to explain what value is delivered by the DMF
Our research found just 57 per cent understood they were obligated to pay a DMF. Nineteen per cent said ‘no’, they did not have to pay a DMF; and 24 per cent said they did not know.
On the surface, these are startling results but it is important to consider the context. As village residents enter the later stages of their ageing, they can be forgiven for losing an appreciation of the contracts they entered – and why.
Research clearly shows that most people choose to join a village because of a major life event which prompts them to seek a new living arrangement. Once settled in the village, however, it is not so surprising that these reasons may fade or be forgotten when discussing the DMF.
The McCrindle Baynes research also asked if the resident would make the same decision to join a village again. Interestingly, just nine per cent said ‘no’. An overwhelming majority of 91 per cent said they would again enter a DMF contract.
On balance then, while the DMF may be disliked in concept, it is accepted.
Clearly village operators need to do more to explain what value is delivered by the DMF as this is also clearly not understood by many people.
What else could help? What do you think?
Discussion4 Comments
I can only speak for myself regarding the DMF, to an outsider usually in a relationship, with a Super Fund, I
can understand people not “GETTING” all this fuss about it.
I accepted it because I felt I would be here till I was “horizontal” as my husband used to handle all the money, and having no sense myself, also hearing there were ex Accountants, Managers etc in the village I chose, I thought they would know what they were doing, so it must be okay. Besides I would not be here to worry about it…..fast forward 12yrs, and thinking about how I would fund moving into a serviced apartment or even further down the track a high care facility if I made it that far, after my DMF is taken out, (only getting back to start with what I paid for it originally) the unit is now worth double that I might add, and Management get that bonus BEFORE the DMF!!! I will be lucky if I can afford a caravan.
Very worrying which ever way I look at it, the only light at the end of my tunnel, is if I die in this unit, it will all work out okay, however that is not in my hands.
The following comment was made in a direct email to Chris Baynes. It comes from Andrew Philip, Managing Director of Retirement Communities Australia. It is posted – with his permission – on his behalf:
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I refer to your article about “DMF” and would like to explain why 97% of residents are satisfied with the Deferred Payment model of retirement villages. It is because it is a Deferred Payment system and not a Deferred Management Fee. A Fee implies that a service is delivered, which is not the case (not for the deferred payment component at any rate).
The Deferred Payment model was developed 40 years ago to make the ingoing cost of this retirement housing option, more affordable. Sound like a familiar need today?
It is a model that was developed on very simple terms….you pay for part of the cost of the house up front (being less than the full retail value of the house), and you pay for part of it when you leave when you perhaps have less need for funds. This enables the resident to sell their existing house at ‘full retail price’ and purchase their new retirement villa at less than full retail price, thereby retaining an amount of capital to live on or to supplement their pension.
Those operators that stay true to this Deferred Payment model don’t have any push back on it from residents when selling new villas. This is because it is demonstrably fair and good value for money. Of course there is no free lunch and the developer does need to make its profit at some point, hence the deferred payment component. Accordingly, if explained openly and transparently to incoming residents we do not experience any resistance to the model. Being good value and affordable for incoming residents, it also tends to result in faster sales rates and much shorter development and construction time frames for the developer. A true win-win!
Hope this helps.
Regards,
Andrew Philip
Managing Director
Retirement Communities Australia
This is a good exchange between consumers and operators about the DMF. The model is a smart one that balances all interests, but it is complex and therefore hard to understand. There is obviously a need for ongoing communications to existing RV residents. Also, we need to try to encourage people to plan for their older age and to research the options before having to make a decision under duress. Even as an operator, I am dismayed at some of the DMF arrangements that seem unfair to the residents. So, be an informed consumer and shop around!
Ray Glickman
CEO
Amana Living
The following comment has been cut and pasted from an email sent to the editor relating to this article. It is posted on Lesley Menzies’ behalf:
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Hi Frank and Earnest,
Yes we all know the DMF is a necessary evil however there comes a time when it should be capped. It is up to 40% in some villages in Victoria now, so including refurbishment costs. up to $10,000 and Capital Replacement charges, 2%, as well as taking most of the Capital Improvement made, there is not
much left over to repay the customer. So consumers beware, please compare these costs before signing away your life savings.
Lesley Menzies
President RRVV