In recent news, the Urban Redevelopment Authority (URA) has prevented a prior practice of re-issuing the Option To Purchase (OTP). This is to curb situations where show flats would promise to extend the OTP for you, by renewing it whenever it lapsed. But with the new restrictions in place, here’s how you could be impacted:
A quick explanation of the terms and new rules
When you buy a property, you begin by securing the Option To Purchase (OTP). This is obtained by putting down a non-refundable deposit, of one to five per cent of the property price.
During the validity period of the OTP – which is typically between 14 to 21 days – the seller cannot sell the property to anyone else. It is up to you to exercise the OTP within the validity period (by making the rest of the required down payment and completing the Sale & Purchase Agreement).
If you don’t exercise the OTP by the time the validity period is over, it will lapse and you will forfeit your deposit. (Note: If you made a five per cent booking fee to a developer, you will “only” forfeit 25 per cent of the deposit.)
However, there were some cases when the developer would offer to renew the OTP whenever it lapsed
Some property buyers need more time to secure the financing for their home.
For example, some may have needed more than the typical 21 days to complete the sale of their previous home, get a bank loan approved, etc. As such, developers would sometimes promise to renew the OTP whenever it lapsed, to give the buyers more time.
However, there are cases where buyers eventually allow the OTPs to lapse instead of following through. This results in what is known as “returned units”.
This can distort the perceived sales figures. For example: say 150 buyers secure an OTP – this would be recorded as 150 transactions. But if 30 of the buyers end up surrendering their deposits later (sometimes as late as 12 to 18 months down the road), then the “true” number of transactions is just 120.
As such, URA is now preventing the practice of constantly re-issued OTPs, as it may give a misleading picture of the real estate market. In particular, our government is worried that inflated sales figures can lead to imprudent buying and euphoria.
As such, URA has imposed some new rules on the re-issue of OTPs
Under the new rules, a developer cannot re-issue the OTP to the same buyer for the same unit, within 12 months after the current OTP expires. In addition, developers can no longer make promises to re-issue the OTP after it lapses (subject to the aforementioned condition).
If you currently have a deal where the developer has promised to renew your OTP (i.e. your OTP was issued with this promise prior to 28th September 2020), the developer can still honour the agreement. However, bear in mind this is the last time they can re-issue the OTP for you in this manner.
How will this matter to home buyers?
There are pros and cons to this new measure.
The main drawback will be to upgraders, or home buyers who need extra time to secure financing. It is still possible to “buy time” by extending the OTP validity period – but this has been capped at 12 weeks.
This is the maximum amount of time you have to settle the sale of your previous home, pay off the outstanding home loan, make sure you have enough cash in your bank or CPF, etc.
This means you can no longer “chope” a unit that you like, and then wait for long periods like a year to get the necessary financing. You really need to make sure most or all of the financing issues are settled, before you walk into the show flat.
If you feel you’ll have any issues getting the loan, selling off your current home, etc. on time, please drop me a message so I can help; it’s especially important that you settle this early, now that the OTP cannot be re-issued like before.
There is also an upside for home buyers
The first benefit is that you won’t be rushed into making imprudent decisions.
It’s true you can’t “chope” your condo before your finances are ready…but neither can other people now (not unless they’re willing to lose their sizeable deposit).
This creates an environment where every buyer acts more responsibly: there’s no reckless rush for the best units, and praying that the OTP can be renewed until financing is found.
Second, there will be a a truer picture of the sales for any new launch, or sales in the overall market.
In the past, you could see lots of people writing cheques in a show flat; but you would have trouble estimating true demand, as you wouldn’t know who was buying “for real”.
This could create runaway optimism via inflated sales figures; and while that’s good for sellers, it’s not in favour of home buyers. What home buyers want is for prices to come down or stay realistic – and that’s exactly what URA is trying to encourage.
So love it or hate it, here are the key steps to take with these new rules:
- Ensure you get Approval In Principle (AIP) before trying to secure an OTP. This tells you exactly how much a bank is willing to lend you – don’t turn your purchase into a dangerous guessing game.
- Clear up any sales issues with your previous home, before you put down a cheque for an OTP
- Remember that the validity period of an OTP can be extended to 12 weeks – you don’t have to use a 21 day validity period. Don’t be afraid to negotiate or push for this if you need it.
Finally, make sure your personal finances are all in order, before you commit to a purchase. Drop me a message if you’re not sure you’re ready, and we can work out what’s affordable in your current situation.
Do follow me on RonChong Property, and I’ll update you as the situation unfolds in Singapore’s private property market.