The Option To Purchase (OTP) is not something we think about often; at least until something goes wrong. Then we’re making sobbing noises, begging for our lost deposit, and fuming about “how the stupid thing can work that way”.
Thing is, both new and seasoned homebuyers should pay more attention to this initial stage of a property transaction, beacuse the OTP isn’t always as straightforward as it seems:
1. The OTP is not standardised for private property transactions
When buying private property, the OTP is not a standardised document. The OTP prepared by the seller’s lawyer, and your own lawyer is supposed to review it and recommend changes to protect you. You shouldn’t assume that the terms in the OTP are “all the same” and sign it without consulting with your lawyer.
For example, the “norm” of a 14-day option period for an OTP is not mandatory, and can be longer. In a recent sale of a $28 million penthouse to Vicky Zhao’s husband, the OTP was originally signed three years prior to purchase although, in reality, sellers’ agents will likely give you the cold shoulder if you suggest anything longer than two months.
Other possible variables in the OTP include:
- The possession period of the seller (i.e. when they have to vacate and leave the property to you)
- The payment method, including the rest of the downpayment (this should be an escrow account for the buyer’s safety)
- The use of the “as is where is” basis for the property transaction (i.e. whether you are accepting the property in its current state, or whether you will accept it only on certain conditions, such as the seller first repairing fire damage)
These issues should all be clarified with your lawyer, who will then send the OTP back with proposed changes.
Note that this doesn’t apply to HDB properties, for which a standard OTP document is used (this is available on the HDB website).
2. Offer to Purchase is sometimes abbreviated as “OTP” as well, but is different and can affect the actual Option to Purchase
The Offer to Purchase is a letter from the buyer to the seller, signalling serious intent to purchase the property. The Offer to Purchase is not usually considered the binding legal agreement, whereas the Option to Purchase is. Also, note that the Option to Purchase is drafted by the seller’s lawyer, whereas the Offer to Purchase is from the buyer to the seller (it’s often drafted by the buyer’s agent).
The wording in the Offer to Purchase can, however, affect the subsequent Option to Purchase. The most famous example of this was in 2013, when an Offer to Purchase stipulated that the “option period” for a transaction should be “three days”.
Well the buyer got three days all right, and the Chinese New Year break saw the OTP expire before it was exercised. Had the Offer to Purchase included the term “subject to contract”, that wouldn’t have happened.
Given that the Offer to Purchase and OTP come in quick succession, make sure you don’t mistake one for the other. Again, make sure your lawyer sees every piece of paper relevant to the transaction, before you sign and send.
3. The option fee isn’t always 1%, it’s negotiable
It’s entirely possible for an OTP to require a bigger option fee (i.e. deposit) than the usual 1% for a private property transaction.
At times, the buyer may even negotiate the amount of the deposit in exchange for other concessions. For example:
Say you want to purchase the property and you’re 100% certain. However, you need extra time to sell your existing property, as you need the cash proceeds first. However, the seller is unwilling to wait so long; they don’t want to risk taking the property off the market for a long time for you, only to find out you’re backing out later.
“In cases where a significantly longer option or completion period is required, a common request from sellers are an increase in option fee or both option and exercise fees,” said Stuart Chng, Founder of Navis Living Group at OrangeTee.
“The higher fees are to justify the sellers’ opportunity cost or mitigate their risks in case the buyer backs out,” he added.
4. For new launches, a “reservation scheme” means re-issuing or renewing a lapsed OTP
In many showflats, you may hear the term “reservation scheme”. This is to allow buyers to “chope” a unit, even if they don’t have immediate financing to buy it.
The reservation scheme does not mean you can reserve the unit without an OTP. Most of the time, it just means the developer will renew or re-issue the OTP, whenever it lapses (there may be a fee for this, such as $300 each “extension”). Note that repeated extensions can get very expensive, such as if the OTP is valid for two weeks each time, but you keep renewing it over a month or two.
Also be aware that you are still signing an OTP, so your initial deposit, plus the costs you incur for extension or re-issue of the OTP, are non-refundable.
These schemes are okay if you need extra time while working out the sale of your existing home, already have loan approval but want to hunt for a lower interest rate, etc. But don’t put your money down if you’re not even sure you can get a loan, as you’ll still lose the deposit if you don’t exercise the OTP.
It’s definitely not “free to chope”.
5. How you treat the cheques matter as much as your signature
If you’re the seller, and you bank in the cheque for the OTP deposit, you’ve already agreed to it. It doesn’t matter whether or not you actually put your signature to the document. This was established in a case in 2008, when the seller instructed the property agent to bank in the cheque but didn’t sign the OTP yet.
As such, don’t bank it in before you’ve scrutinised the OTP with your lawyer, and are fully satisfied with the terms.
Also, for transactions using cheques, note that you cannot cash cheques past the OTP deadline and then claim the buyer failed to exercise the OTP. If you lose the cheque, damaged it for some reason, etc., then you’re still bound by the OTP, even if the seller has to re-issue a new cheque past the deadline.
The sensitive issue is when the cheque somehow gets to you late. For example, if the buyer sends a cheque to exercise the OTP, but due to courier issues it arrives a day late. This will then be up to your lawyers to resolve.
Buyers, for safety’s sake, don’t wait till the last minute to send the cheques!
Do you have any other questions relating to the Option to Purchase? Let us know in the comments section!
If you found this article useful, 99.co recommends Sales & Purchase Agreement: A guide for new launch condo buyers and Covid-19 and Property: 12 Legal Questions Answered by Lawyers
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