Buying an ORA: What will you, or your estate, get back from the village?

When people move into a retirement village, they usually focus first on the amount they need to pay to enter the village. That makes sense. It is a large sum, and it is often being funded from the sale of the family home.

It is just as important to understand what happens later. If you leave the village, what is paid back to you? If you die while living there, what is paid to your estate? How long might that take? What can the village deduct before payment is made?

These are questions to ask before signing the Occupation Right Agreement, because the answer is in the documents.

The entry payment is only the starting point

The entry payment is the amount you pay for the right to occupy the unit. In most retirement villages, you are not buying the unit or the land in the same way you would buy an ordinary home. The village operator continues to own the village property, and your rights come from the Occupation Right Agreement.

This affects what happens when you leave. The amount repaid at the end is usually less than the amount paid at the start. The ORA will set out what deductions can be made, how those deductions are calculated, and when the balance is paid.

For many people, this is one of the biggest differences between selling a house and moving out of a village. When a house is sold, the owner usually expects to receive the sale proceeds after paying the usual sale costs and any mortgage. With an ORA, the repayment is dealt with under the agreement. There may be deductions, and the timing of repayment may depend on the unit being re-licensed.

The deferred management fee

The deferred management fee (DMF) is usually one of the main deductions and be up to 30% of the original purchase price (or entry payment). While some villages do permit their residents to receive any capital gain in their property (as well as share in any loss), this is a common feature in ORAs.  

Where there is a DMF it is important to recognise that different villages use different wording. It may be called a deferred management fee, village contribution, facilities fee, exit fee or departure fee. The name matters less than how it is calculated.

The ORA should be checked to see:

• what percentage is charged;
• whether it builds up over time;
• when it reaches its maximum;
• whether it is calculated on the original entry payment or another amount;
• whether it includes any other costs;
• whether additional deductions can still be made.

Some people are comfortable with the deferred management fee once it has been explained. The important thing is knowing the amount, or likely amount, before the agreement is signed.

Weekly fees and ongoing costs

The weekly fee also needs to be understood. You need to know what it covers, when it can increase, and whether it continues after you have left the unit.

This can be relevant if someone moves into care, or dies, and the unit has not yet been re-licensed to a new resident. Families can be surprised if they thought fees stopped as soon as the resident moved out.

This is an area where the law is changing, so the particular ORA and the current position at the time need to be checked carefully. The documents should still be read on their own terms. If the village has already changed its approach, or if new rules apply, that should be discussed as part of the advice.

Refurbishment, reinstatement and other deductions

Another area to check is what the village can deduct for repairs, reinstatement, refurbishment, marketing or administration costs.

This can be a real issue because the words used in the ORA may have different consequences. Damage, ordinary wear and tear, reinstatement and refurbishment are not necessarily the same thing. Some agreements are clearer than others about what the resident must pay for and what the village must meet.

It is worth asking how this works in practice. Who decides what work is required? Is there a cap on what can be deducted? Is the resident or estate told what work has been done? Can the estate ask for details of the deductions before the final amount is paid?

These questions are much easier to deal with before signing than after the unit has been vacated.

When the money is repaid

The timing of repayment is one of the most practical things to understand.

The ORA may say that repayment happens only once the unit has been re-licensed to a new resident. If that takes time, the repayment can also take time.

This can affect the resident if they need funds for care. It can also affect the estate if the resident has died. Executors may be waiting for the repayment before they can finalise the estate, pay expenses or make distributions to beneficiaries.

Before signing, it is worth asking when repayment is due, whether it depends on re-licensing, whether interest is payable if there is a delay, and what information is provided while repayment is still outstanding.

What your estate may receive

If you die while living in the village, your estate will usually receive the balance payable under the ORA after the permitted deductions have been made.

That amount may be one of the main assets in your estate, especially if the family home was sold to fund the village move. It may also take time to be paid.

This is one reason to review your Will when moving into a village. Your estate may look quite different once the home has been sold and the main asset is the right to receive repayment under the ORA. Executors should also understand that the village repayment may not be available immediately.

If adult children or other family members are likely to be involved later, it can be helpful for them to understand the general position as well. That does not mean they are making the decision for you. It simply means the people who may one day be dealing with your estate are less likely to be surprised by the timing or the amount repaid.

Looking at the figures before signing

The financial side of an ORA should be looked at carefully before signing.

What are you paying to enter?

What weekly fees will you pay?

What can be deducted when you leave?

How is the deferred management fee calculated?

Can refurbishment or other costs be deducted?

When is the repayment made?

What is likely to be paid to your estate?

Those questions should be part of the legal advice on the ORA.

They also sit alongside the practical side of the move. The entry payment may come from the sale of the family home. The repayment may later be part of your estate. If there is a family trust involved, the source of funds and the way the payment is recorded may need to be considered as well.

It is also worth knowing that everyone does not need to be in the same room for this process to work well. We regularly work with residents, attorneys and adult children across New Zealand and overseas, using secure systems for meetings, documents and signing. That can be helpful where someone is moving to a new town or city, or where family members are helping from a distance.

Next, I’ll look at what to consider if there is a family trust involved in the sale of the family home and buying of the ORA.