The Offer to Purchase and Option to Purchase are sometimes both referred to as the OTP (although these days, we use “Offer” and “Option” to avoid confusion). They also happen quite close together in the property transaction process, so it’s not surprising that buyers sometimes confuse one for the other.
It’s good to know the difference, not least because the wording in the Offer to Purchase can later affect the Option to Purchase. Here’s what you need to know:
What is an Offer to Purchase?
The Offer to Purchase is a formal letter from the buyer to the seller, expressing a serious interest in the property. Unlike the Option to Purchase, the Offer is not considered legally binding. The details on the Offer to Purchase include:
- The property address
- The offered price for the property
- The duration of the subsequent Option to Purchase (usually 14 days, but you can try asking for a longer duration)
- Date for completion of transaction (usually six weeks after exercising the option, but you can try asking for more time)
- Validity period of the Offer to Purchase (3 days is the norm)
- Additional terms to be included in the Option to Purchase (e.g. a 5% deposit)
- The clause “subject to contract” at the header (we’ll elaborate upon this later)
Usually drafted by the buyer’s agent, the Offer to Purchase is usually accompanied by a cheque—most often 1% of the purchase price as deposit—to be used for the Option to Purchase.
Upon accepting and signing the Offer to Purchase, the seller may proceed to issue the Option to Purchase (OTP)* to the buyer.
If the seller decides to reject the Offer to Purchase, or when the Offer’s validity period lapses without an OTP being issued, the seller must return the cheque to the buyer.
So, the seller should not bank in the buyer’s cheque before signing the offer, as doing so could turn the Offer into a legally binding contract like the OTP.
*Although Offer to Purchase can also be abbreviated as OTP, this is frowned on these days, as it can lead to confusion. It’s more common now to refer to it as just the “Offer”, while referring to the actual Option to Purchase as the “OTP”.
What is an Option to Purchase?
We have a more detailed description in an earlier article. But to quickly recap, the OTP* is the actual, legally binding document for purchasing a property. As mentioned, the cost to secure the OTP is usually 1% of the purchase price.
During the validity period of the OTP (which is specified in the Offer to Purchase), the seller cannot accept any other offer from interested buyers.
Buyers must exercise the OTP within the validity period, or else it will lapse, leading to the forfeiture of the 1% deposit
The Offer to Purchase can affect the OTP, and its wording matters.
A famous example of this is the Montebleu condo incident in 2013. In this legal case, the wording on the Offer to Purchase said the “option period” (the OTP) would be “three days” instead of the usual 14 days.
Along with the Offer to Purchase, the buyer gave the seller a cheque for the 1% option fee. When the seller issued the OTP, the three-day option period fell right in the middle of the Chinese New Year holiday.
This left the buyer in a bind; the buyer’s agent was unble to deliver the buyer-signed document on time to the seller’s solicitor by the expiry date of the option, as offices were closed.
A day late, when the OTP was submitted, the sellers rejected it on grounds that it was already past the expiry date, and sought to keep the 1% option fee.
Ultimately though, the Court ruled that, regardless of the situation regarding the OTP, the both buyer and seller had entered into a legally binding contract because of the following two reasons:
- The seller had banked in the buyer’s cheque for the 1% deposit
- The clause “subject to contract” was not found on the Offer to Purchase, allowing it to become legally binding after the sellers have signed and banked in the buyer’s cheque
Following the incident, property agents are now careful to include the exact phrase “subject to contract” in the Offer to Purchase. This is a clause that can prevent the Offer to Purchase from being construed as legally binding, and serve as a ‘safety net’ for both buyers and sellers prior to the signing of an actual OTP.
In any case, you can see how the Offer letter can affect the OTP, even if the Offer isn’t a binding legal document.
Why do we still need an Offer to Purchase?
While it’s possible for buyers and sellers to proceed straight to the OTP without first sending an Offer to Purchase, sending an Offer letter is a standard practice that’s used by all property agents—and with good reason.
Issued by the buyer agent on instruction by the buyer, the Offer to Purchase allows buyers to specify the terms of the subsequent OTP. For example, say you’re upgrading from an HDB flat to a condo and depend on the proceeds from selling your flat, specifying a longer OTP period can give you more time to consider and accept the best offer for your flat.
Likewise, the offer letter can specify the date of completion; this is of practical importance to buyers, as you need to be clear on when the transaction will be settled and you can move in.
So, if you’re buying a property, it’s always a good idea to get your agent to draft a formal Offer to Purchase if you’ve seen a home you really like. After all, it’s all priced into the commission that you’ll end up paying, upon a successful deal!
What details and terms will you include in the Offer to Purchase? Let us know in the comments section!
If you found this article helpful, 99.co recommends 3 questions first-time HDB resale flat buyers must answer and 5 ways selling your property can go horribly wrong (and how to fix it)
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