What is Life Rights?
One of the most frequent questions - What is 'Life-rights'? During the twenty years that I have worked with Retirement Villages, I have often been struck by the lack of understanding surrounding the principles of life-rights schemes. Sometimes people even tend to shy away from such transactions; their aversion either born of ignorance; or motivated by self-centred concerns about diminishing legacies. Weigh up your options carefully The various options that prospective purchasers encounter when embarking on a search for retirement accommodation can be extremely confusing. Options include freehold / full title, share block, as well as sectional title and life-rights. Of the four, the two main ones confronting would-be purchasers are sectional title and life-rights; with the latter being the most misunderstood. And, as retirement choices are invariably one-way streets from which few are able to retrace their steps unscathed, it is essential that the various options are considered; and the correct choices made. How does life-rights work? The question of how does life-rights work, is often akin to '"how long is a piece of string?" But simply put: ... it is similar to rental paid in advance, with full ownership never being granted. Consequently bonds and loans cannot be raised against the value of the property, as in effect they are never owned by occupiers. On the plus side no transfer duty is payable. And while some developers may claim that no rates are payable, if a situation arises where a developer is rated, this will merely be passed on to occupiers in the form of increased levies, with the attendant risk that, not being the owner, the life-rights holder may then not be eligible for the pensioner's rebate granted by some municipalities. The life-rights system is considered by many to be an option that costs less and provides the retired individual with the right to occupy specific accommodation for the rest of their lives. This right is paid for with a capital investment, and on relocation or death, the use of the unit reverts back to the developer, with the original purchase price either being forfeited or, to varying degrees, refunded. Some later models even refund the full purchase price, and increasingly portions of any profit generated by the resale of the unit are credited to the deceased's estate. If a resident voluntarily vacates the unit, the rules are normally the same as for death. Life-rights sales initially commenced as a means by retirement accommodation could be made affordable to working class people. Many were developed by NPOs for the purpose of funding their core businesses i.e. The surpluses generated by life-rights sales were used to fund other charitable activities in which the organisations was engaged. In a manner of speaking, it was a case of borrowing from Peter to pay Paul, with both parties benefiting from the transactions. Today, however, even profit-driven developers, having cottoned on to the financial advantages of life-rights schemes, and many today also increasingly using this form of sales arrangement. Retirement Matters 9 9 TO READ PREVIOUS NEWSLETTERS, or OBTAIN BOOKS WRITTEN BY THE AUTHOR, PLEASE LOG IN TO www.henryspencerauthor.com OR PHONE HIM ON... 072-514 0913 Mobile: 027+72-514 0913 OR EMAIL HIM ON: halfmens@telkomsa.net One of the most frequent questions - What is 'Life-rights'? (continued) There are many variations to the structuring of life-rights sales. The earlier arrangements, in the 1990s, were very often based on the purchaser paying only a small percentage of the cost of the unit, but receiving nothing back if they vacated or died. For example, if a unit cost R1 million to build, it could be purchased for R400,000; but, after a 3-month cooling off period, the tenant (or the family) received nothing back if they left or died. The successful establishment of this model depended very much on the developer's ability to outlay the initial capital and to sustain the loss of interest over the period that would be required for the first departures or deaths to materialise. You thus had to be very sure that you were not going to change your mind, because the longer you lived the more you gained - similar to being married rather than just having an affair! Today there are as many variations on the liferights theme as marketing can devise - varying from low purchase prices with no return, to high prices and a return that may even include a portion of the profits generated on resale. Some variations are as follows: 1. Pay 50% of the 'build' cost, and on death or departure, get nothing back. Low cost - no return! 2. Pay 75% of the 'build' cost, and on 'departure,' get 50% of the price back. Medium cost - medium return. 3. Pay a market-related price but on death or departure, get the purchase price + 40% of any profit generated back. High cost - high return. (This model potentially holds a similar risk for the developer, except that the developers have, theoretically, already made a profit on the initial sale). In one of the latest Retirement Villages in which I have been involved, the units were sold at higher than built cost but the return on death or departure yielded the full investment plus slightly less than 50% of any profit gained from the resale. (This result is fine in a booming property market, but is less attractive in a down-turn). And then there are levies It is self-evident from these examples that there are no free lunches! It is merely a matter of matching financial resources (and needs) to the models on offer. All have differing benefits and pitfalls! But in choosing a scheme, please remember one important aspect: Levy! Levy! Levy! The capital outlay of a retirement unit does not even begin to compare with the burden of annually increasing levies... especially if one spouse requires frail care? Conclusion In conclusion, I can only advance my personal belief that, in specific circumstances, life-rights is as attractive an option as sectional title. Do not be put off by the fact that your investment may be reducing over a period of time. Your purchase of retirement accommodation should not be considered a financial investment. It should rather be viewed as the last and most important lifestyle investment that you are likely to be called upon to make. Do not be swayed by family decrying the merits of life-rights. Do not be put off by your bank manager, who is alarmed at the prospect of declining investments. Do not be persuaded by sweet-talking sales people or developers! Retirement accommodation decisions are about you, so ensure that you purchase reasonably-priced accommodation from a company that you can trust, in a complex where you will be happy, and where you will be able to enjoy an affordable and meaningful life.