On this fateful date, URA dropped a new circular to address the raising concerns about the re-issue of Option To Purchase.
This is a move that is targeted mainly at Developers for New Launch purchases.
Is this a Good or a Bad move?
THE BACKGROUND STORY ON RE-ISSUE OF OPTION TO PURCHASE
Let us find out more on the typical protocol for buying a new launch condominium directly from the developer.
For a typical new launch purchase, after viewing the showflat with their agent, the buyer if they are keen to purchase and commit to the property, they will have to pay a 5% booking fee that is based on the purchase price of the unit that they are purchasing. In exchange, the developer will then issue them a Option to Purchase (OTP) which will typically expire three (3) weeks after the Sale and Purchase Agreement (SPA) and copies of the title deeds are delivered to the buyer.
The three weeks is given to the buyer to encourage them to recheck on their finances and for them to fully confirm that they have the financial means to purchase and sustain the property. If the buyer backs out within this three weeks period, they will have to forfeit 25% of the booking fees that they have paid upfront.
So, if they commit to buy a $1,000,000 property;
5% Booking Fee = $50,000
On lapse of Option To Purchase or non exercise,
25% of $50,000 = $12,500 will be forfeited by the developer.
THE STORY OF MR & MRS TAN
A potential buyer, Mr & Mrs Tan has a HDB on hand that had a profit of $150,000 on paper. After speaking to some property agents, they wanted to grow their asset and was introduced to buy a $1,000,000 new property launch as an investment.
They had enough cash to settle the 5% downpayment of the property but not enough for the balance 15% to exercise the option plus Stamp Duty.
So what to do? Can they still buy?
The answer is YES!
And the solution was this;
Mr & Mrs Tan can still commit and pay the 5% to get the Option To Purchase and lock in the new launch property first.
Next, they had to put up their HDB on the market for sale.
Once they found a buyer to purchase their HDB and completes the sale, they will have enough money to pay the balance 15%
The next question that you might ask is that a typical HDB sale takes about three months, and they only have three weeks to exercise the Option To Purchase;
HOW IS THIS POSSIBLE??
They were then introduced to this thing called reissuing of option.
As the name implies, the developer will keep reissuing a new option to purchase to the buyer before it expires on the third week.
Prior to this, the Mr & Mrs Tan had spoken to the developer on their request of how long they can sell off their current property and how long they need to exercise the option to purchase. Once the timing is agreed upon, the reissuing of option starts.
Mr & Mrs Tan were very lucky to get a buyer within two weeks of marketing and subsequently completed the sales of their HDB and collected their money within three and a half months.
With the sales proceeds from their HDB, they manage to pay the 15% to exercise the option to purchase and also pay the stamp duty and the subsequent 5% when the foundation of the new launch property was completed.
Thereafter the bank loan kicks in and they start to pay monthly for their investment property.
In Mr & Mrs Tan case, they got their choice unit in the new launch and additionally;
-Did not have to pay Additional Buyer Stamp Duty
-Manage to get 75% bank loan as there was no more existing housing loan after HDB was sold
-Were able to use their CPF to pay for their new launch property.
Now the question is this, are there so many lucky people like Mr & Mrs Tan?
There are also many cases whereby the buyer can’t sell off their apartment after many months and finally decided that they had enough of stress and forfeited 25% of their 5% deposit on the new launch and moved on after wasting time and money.
And the above is something that sets off alarm bells ringing for URA.
The other reason is also the fact that through the reissuing of option, it gives a false sense of boom market and the idea that the new launch properties are selling like hotcakes. And the worse thing is that they do not have the figures on these type of cases.
Now, in a booming market, would the developer even consider the idea of reissuing of option and risk having a unit that they thought that they happily sold, go back to them?
And thus the press release to address this issue.
NO. 1 THING TO NOTE WITH EFFECT FROM 28TH SEPTEMBER 2020
Option To Purchase will not be allowed to re-issue to the same buyer for the same unit within twelve (12) months after the expiry of the earlier Option To purchase by the developers. This applies to Option To Purchases that are issued from today onwards.
The controller of housing (COH) understands that there might be some buyers that has a genuine need to sell off their existing property before exercising the Option To Purchase. As such, they have given a special concession to extend the validity period of the OTP to up to twelve (12) weeks from the Option Date. This is provided that both the buyer and the developer are agreeable to such arrangements.
In addition, they MUST submit their application for extension to [email protected] with the following information;
-a copy of the Option To Purchase (OTP)
-expiry date of the Option To Purchase (OTP)
-reasons for requiring more time to exercise the Option To Purchase (OTP)
Good news for Option To Purchases that have already been issued prior to the effective date of this circular, the developer can still honor their commitment to re-issue the OTP for the same property up to the agreed period. This commitment should be in the records, whether in writing or otherwise.
These timely measures are put in place amid the COVID-19 pandemic with uncertainties surrounding the current economic situation worldwide and also the jobs market especially.
Always remember, real estate is a big investment.
Make sure to consult with your trusted real estate agent and work through your financial plan, your investment horizon plan and exit plan before committing to that real estate property.
If in doubt, feel free to consult us at SGPropertyHome and we can share with you more and work out a customized plan tailored to your needs absolutely FREE!
On a side note, the Controller Of Housing (COH) manages developers with a valid Housing Developer Sales License.
So these developers will have to follow the above regulations.
The Question is,
How about those developers with a No Sale License or the project has less than 5 housing units?
Think about it…