When you’re comparing retirement village contracts, it’s easy to feel overwhelmed by all the numbers — deferred management fees, refurbishment costs, capital gains, and buyback timeframes. So which contract is really better value?
Let’s look at an example.
A reader recently asked about two contracts:
- Option 1: A lower deferred management fee (DMF) of 3.25% per year, capped at 26% of the purchase price, with no refurbishment or sales costs, but no capital gain.
- Option 2: A higher DMF of 3.75% per year, capped at 30% of the next sale price, plus a 2% sales fee and refurbishment costs — but it includes capital gain if it occurs.
Understanding what you’re really paying for
The first option provides certainty — you know what your costs will be upfront and you won’t have to pay for renovations or sales commissions when you leave. However, because the DMF is based on the original purchase price and you don’t share in capital gain, inflation will gradually reduce the value of your exit entitlement.
The second option could look more appealing because you get to keep any capital gain. But the trade-off is higher exit fees — around 32% of the sale price once the DMF and sales fee are added — plus refurbishment costs, which can vary dramatically depending on the condition of the unit and how long you’ve lived there.
How to make an informed comparison
It’s impossible to know in advance which contract will leave you better off because capital growth (or loss) and renovation costs are both uncertain. To make a realistic comparison:
- Be conservative with your capital growth assumptions — no more than 3% p.a. is a good guide.
- Be generous when estimating renovation costs — starting from $10,000 per year is reasonable.
- Check whether the purchase price and buyback period are the same under both contracts. These details can affect your pension and rent assistance entitlements, as well as how quickly your funds are returned if you later move into aged care.
Getting clarity before you sign
If the village offers it, a Village Guru Report can make comparing options much easier. It clearly outlines your ingoing, ongoing, and outgoing costs and estimates your pension and rent assistance entitlements. With this information in hand, you can approach your downsizing decision with confidence — and avoid any unpleasant surprises later.
More ways to make your downsizing journey simple
Downsizing Made Simple helps you understand all the moving parts of retirement living — from comparing contracts and fees to estimating your age pension and rent assistance.
Explore our free checklists, calculators, and Village Guru Report resources to plan your next move with confidence and peace of mind.
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