Are retirement properties sound investments or inheritance headaches?

Almost one in eight (12%) over-70s are hoping to downsize their property or have done so already as a direct result of the pandemic.

That is one of the findings from research shared with Guardian Money that suggests many older people are rethinking their living arrangements after having been left isolated for prolonged periods during the lockdowns. Many will also have reflected on the devastating impact that Covid-19 had on some care homes.

The survey was done by Retirement Villages Group, a developer that builds homes where residents are able to live independently but have access to communal facilities. It says there has been a jump in inquiries during the coronavirus crisis.

Its chief executive, Will Bax, says downsizing can give older people financial freedom and make homes available to those who want to move up the housing ladder. “This is a win-win and we call on government to do more to support older people in making the choice to move into a new breed of later-life communities across the country; aspirational, connected, thriving places that play a vital role in their local neighbourhoods,” he says.

However, there has been criticism in the past from organisations such as the Law Commission about the high costs and restrictions that can often be associated with specialist retirement housing.

Guardian Money has heard from readers who say they are struggling to sell properties they have inherited that are aimed at the retirement market.

Some older people who buy a retirement property think it will be a sound investment to pass on to their family after they have gone. Data suggests, purely in terms of property values, that is often the case. But, equally, they may inadvertently be bequeathing their loved ones a big financial headache.

While traditional care homes usually offer single-room accommodation for a weekly rent where the fees are usually inclusive of personal care, with the properties operated by companies such as the retirement developer McCarthy Stone, the emphasis is on active independent living. The properties do not tend to be suitable for people with significant care needs, such as those with advanced dementia.

These are predominantly leasehold retirement homes in “age-exclusive” developments that typically come with service charges, ground rents and, in some cases, sizeable exit fees, and often impose restrictions on who is able to live there.

There are several models. For example, there are the developments operated by companies such as McCarthy Stone that might average about 40 or so flats. Then there are purpose-built US-style retirement villages. These have traditionally been quite large-scale developments – 200-plus properties in some cases – located in the countryside and on the edge of towns, with their own communal facilities such as restaurants, gyms and tennis courts.

More recently, developers have been buying up vacant retail and office sites in urban centres to build retirement villages for older people keen to be close to high street shops, eateries and cultural attractions.

Retirement Villages Group is one of the UK’s biggest players in this sector – it operates 2,000 self-contained homes across 16 sites and has plans for more than 5,000 new homes across 30-40 new sites in the next 10 years.

While the emphasis is often on buying a property, in many cases you can rent or part-buy, part-rent (AKA shared ownership).

Many developments have a minimum age, which might be anything from 55 to 70, and most retirement housing is sold on a leasehold basis. Traditionally leases on these properties were for 99 or 125 years, although many newly built retirement properties now come with 999-year leases.

The leaseholder often has to pay ground rent, and this can vary greatly. For example, McCarthy Stone says its ground rents are typically between £400 and £500 a year (£500-£600 a year within the M25), although its bungalow and cottage developments are sold on a freehold basis, so there is no ground rent payable on those. As part of a major shake-up of the leasehold system, the government has committed to “set future ground rents to zero”, although this will not apply to retirement properties until after April 2023.

Then there is the service charge, which will often be thousands of pounds a year. For a one-bedroom flat you might expect to pay between £1,500 and £3,000 a year but for some more high-end developments or where higher levels of care are being provided, you might be looking at £10,000-plus a year, says the charity Age UK, which has a useful factsheet on buying retirement housing.

Sometimes leaseholders are required to pay a fee when the property is sold or sublet, and this is often a percentage of the resale price or market value. Some companies charge as much as 30%, Age UK says.

Retirement Villages has something called the assignment fee, which is payable every time one of its properties is resold. This fee ranges from 10-15% of the resale price, with most at about 10%, the company says. It adds that sizeable chunks of its villages are allocated to communal space and amenities, and the fee “creates the financial incentive for developers … to provide these amenities and services, which are key to helping our residents stay active, healthy and sociable”.

McCarthy Stone used to have a transfer fee – AKA an exit or event fee – when a flat was sold or rented out. In 2008 the company abolished this fee on all developments built after that date. However, its website adds: “If the development was built by us before September 2008 but third parties own the freehold, we are unable to control the transfer/exit fee, but the owners will be fully aware of this.” McCarthy Stone does, however, charge a 1% “sinking/contingency fee”, which is paid on resale.

When it comes to selling up, there will typically be a minimum age for who can live in the property, which may mean a smaller pool of potential buyers.

Figures from Rightmove suggest that retirement properties listed on its site are taking twice as long to sell as the market as a whole. It says in June 2021 it was taking an average of 83 days for a retirement flat to move from for sale to under offer compared with an average of 38 days across all listings. This includes new-builds as well as resale properties. It says the average asking price for a resale retirement property is £285,445, while new-builds, which make up a small part of the market, are priced at £472,281.

John Evans* from East Sussex is desperate to sell the retirement flat his stepfather left him when he died before Christmas. He put it on with a local estate agent but after several months with no takers he put it up for auction, where the property, bought several years ago for £75,000, went for less than a third of that. But the sale appears to be on the rocks, and now he says he would consider taking only £1 to get the property, and the service charges he faces, off his hands.

The property is in a development offering assisted living – residents have an emergency cord, and there is someone on-site to help at all times. A cleaner comes every week, and there is a restaurant that offers cooked meals at a low cost. The service charge, which was £7,500 when his stepfather moved in, is now £10,000, and a 4% increase is on the way. “A lot of the service charge goes towards funding the restaurant,” he says. “At the beginning of lockdown the restaurant staff took his lunch up every day and the cleaning lady went in. It was very good for him.”

His stepfather originally bought his flat for £75,000. “I put it on for £49,000 – I thought that was a reasonable price,” he says. He says he knew quickly “with lockdown you aren’t going to get anyone to come out and look at a retirement flat”, so after six months he decided to go to auction, choosing a reserve price of £5,000 – “I just wanted to shift it.” He is hoping the sale goes through but is worried it might fall through. “My wife and I have paid off our mortgage, we have no debts – we did all of this and then, wallop, we have been left with a £10,000-a-year bill,” he adds.

Another reader, Lorraine Hepburn*, received an email telling her that her father’s retirement flat could be repossessed because she had been unable to pay the service charges and ground rent demanded by the company that runs the building.

When Hepburn, who is disabled, lost her father in December 2019, she inherited the property in London that he and her mother had bought 12 years previously.

She had lived there, caring for him for the last three years of his life, and stayed as she sorted out his affairs. She continued to stay there when the coronavirus hit as she was shielding and the property was close to her doctors.

However, she was unable to pay the service charge demanded by the property’s management company, FirstPort, and will be unable to do so until the property is sold.

She was trying to get work done on the property before putting it on the market when in June she received a letter saying that unless she paid £1,235 owed in ground rent and associated admin charges within 14 days, “the lessor will take steps to re-enter the premises and forfeit the lease without further notice”.

She says she does not want to avoid the charges and will pay them once the property is sold. It was valued at between £240,000 and £270,000 when her father died, and there are no other debts to be cleared when it is sold.

After Guardian Money contacted FirstPort, the owner of the property, Fairhold Homes (No 11) Ltd, agreed to put the legal process on hold while the property was marketed.

A spokesperson said: “When a resident passes away, we, of course, put charges on hold until probate is granted. However, they can’t be paused indefinitely, and any shortfall in funds affects all the other retired people who live at the development.

“As no response was received in relation to the arrears that had been outstanding for over a year, a final notice letter was sent to Ms Hepburn to provide a further opportunity to settle the arrears. We are, of course, sympathetic to Ms Hepburn’s situation and have previously offered her a payment plan, which was not accepted. We will assist in any way we can and have agreed to pause any further action while a plan is put in place for her to actively market the property. We have also suggested she contact a specialist estate agent for assistance with the sale and would encourage her again to do this.”

Hepburn says she has offered, and is still keen to set up, a payment plan with the company.

“I’m on disability payments, so I can’t afford £300 a month, but I want to work something out with them. I have someone finishing the work now and, fingers crossed, it will be on the market at the end of September; however, how long it will take to sell is another thing.”

* Name has been changed.

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