A longstanding practice of letting buyers of uncompleted condo units repeatedly obtain reissued Options to Purchase without risk of losing their booking fee came to an abrupt end on 28 September, when the Urban Redevelopment Authority (URA) issued an immediate directive for developers to cease this practice.
The directive, which was published in a circular on URA’s website, stated that developers shall adhere to a strict three-week validity period for the Option to Purchase (OTP), and no reissues will be allowed.
“The OTP will expire three weeks after the Sale and Purchase Agreement (S&PA) and copies of the title deeds are delivered to the intending purchaser. The intending purchaser will have to exercise the OTP before it expires by signing the S&PA and returning it to the developer. If the purchaser fails to exercise the OTP, 25% of the booking fee may be forfeited by the developer,” said URA in its circular.
Note that from the point of booking the unit, the S&PA typically takes two weeks to reach the intending purchaser. So technically, with OTP reissuing no longer allowed, the buyer of a new launch condo has a total of five weeks to exercise the OTP (by signing the S&PA) from the point of booking/paying the booking fee*.
*The booking fee, also known as the option fee, is 5% of the purchase price of the property.
Why has URA cracked down on OTP reissue?
In August, URA had openly expressed its concern about the repeated issue of OTPs, citing that such a practice “inflates home sales figures”.
“From the government’s perspective, the practice of reissuing OTPs has distorted the true pace of developer sales and therefore could have misled public perception of the property market,” explained Eugene Lim, Key Executive Officer at ERA Realty.
URA also highlighted that OTP reissuing arrangements are also being “gamed” by property investors or speculators who may eventually not proceed to exercise the options, thus aborting the deal, something which could result in a breach of loan covenants stipulated by banks to developers.
In the circular announcing the restrictions, URA also asserted that enforcing a three-week OTP validity period will “encourage purchasers to exercise financial prudence and commit to purchasing a property only when they have the financial means to do so.”
“Purchasers will be exposed to the risk of forfeiting 25% of their booking fees if they commit to new property purchases without securing the necessary finances upfront,” the authority said.
Eugene, however, disagreed that URA’s measures would effectively encourage financial prudence as he believes most buyers are already financially prudent. “The banks granting loans have strict templates to ensure that,” he said.
“Nowadays, no one walks into a showflat to buy a unit that is well over a million dollars if he does not have the financial capacity to do so,” he told 99.co, adding that the reissuing of OTP has been a benevolent “proactive approach” by the market to help buyers who needed more time to exercise the OTP.
“There is practically no speculation in the market today, just look at the sub-sale figures!”
OTP restrictions will affect “genuine upgraders” most, say agents
Just last week, PropNex CEO Ismail Gafoor had told The Business Times that, if “genuine upgraders” were allowed to defer the upfront payment of Additional Buyer’s Stamp Duty (ABSD), URA would see a reduction in the repeated issuing of OTPs.
‘Genuine upgraders’ refers to buyers who are intending to buy a new property for their own stay, and wish to sell their existing property.
Once the OTP is exercised, these upgraders have only 14 days to pay the hefty ABSD (12% of the purchase price), which can only be refunded upon selling the existing property.
With OTP reissuing no longer allowed, many upgraders’ plans could get derailed. On one hand, it’s risky to sell the property without booking a new unit. On the other hand, it’ll also be difficult to find a buyer to sign the OTP for their existing property in the five-week time frame after booking a new unit.
In the latter scenario, if the upgrader is unable to find a buyer for his/her existing home, he/she will either be saddled with the 12% ABSD upon exercising the OTP, or be forced to forfeit the new unit, a quarter of the booking fee and lose the right to buy the same unit for a year (which we’ll talk more about later). This is a triple whammy.
If the upgrader still has an outstanding home loan on the existing home and is unable to find a buyer for it, this means that he/she will incur a 45% downpayment, instead of 25%, on the new home. Together with the upfront ABSD, this amounts to a significant outlay that will force most buyers to pull out of buying their new home and forfeit 25% of their booking fee.
So, with the new regulations, the stakes appear stacked against the upgrader. “Now, there are definitely worries among genuine buyers who wish to sell their properties first, but at the same time wish to secure a new unit,” said Aaron Wan, Group District Director at PropNex.
“Not everyone has the capability to take on a second loan at 45% downpayment, on top of a 12% Additional Buyer’s Stamp Duty (ABSD) that can only be returned to them upon the sale of the existing home,” he explained.
Edwin Goh, Branch Division Director at ERA Realty, agreed, telling 99.co that “it’s now harder for the HDB upgrader to transit to a private condo.” He added that demand may also shift towards projects that are nearing their completion dates, or towards the resale market where buyers have the option of obtaining bridging loans that can cover the upfront ABSD they need to fork out.
No way for developers to skirt around new OTP ruling
For developers, one thing’s for sure: URA took absolute care to word its directive such that they cannot devise new ways (i.e. new agreements) to let buyers hold onto their units beyond an initial three-week period.
Under the circular’s Annex A, new conditions restricting the reissue of an OTP to the same purchaser for the same unit are outlined. From 28 September, developers are not allowed to “enter into any agreement or arrangement not being an option to purchase prescribed under the Housing Developers Rules.”
This means that developers are not allowed to give the buyer any additional right, entitlement or commitment pertaining to the purchase of units in a housing project, whether it’s in OTP form or otherwise.
In addition, buyers who let their three-week OTP lapse will be barred from repurchasing the same unit in the housing project for 12 months. Agents whom 99.co spoke to unanimously felt that this condition is unnecessarily harsh.
With immediate effect, developers are also obligated to inform buyers of the above debarment period and obtain written acknowledgement from them prior to issuing the OTP.
Buyers who signed OTPs before 28 September unaffected
According to URA, as long as the OTP was issued before 28 September, developers may continue to honour them even if the OTP contains an agreement to allow the reissue the OTP for the same property up to a specified period. This agreement must be on the developer’s records, “whether in writing or otherwise”.
To summarise, URA has imposed the following with effect from 28 September 2020:
- Restrict developers from providing upfront agreement to purchaser(s) to reissue OTP
- Restrict developers from reissuing OTP to the same purchaser(s) for the same unit within 12 months after the expiry of the earlier OTP; and to inform purchaser(s) of this condition upfront
Can buyers request an extension of the three-week OTP validity period?
Despite URA’s firm hand, the authority expressed understanding towards buyers with genuine need to have a longer OTP period. Recognising that “there may be some purchasers who require more time to finalise the necessary arrangements before exercising the OTP”, URA has decided to give some leeway on a case-by-case basis.
Developers or developers may apply to URA to extend the validity period of the OTP by up to 12 weeks from the OTP date, provided that both parties are agreeable. Purchasers or developers who wish to apply for an extension of the OTP validity period may submit their application to [email protected], with the following information:
- A copy of the OTP
- Expiry date of the OTP
- Reasons for requiring more time to exercise the OTP
Note that approval for extensions will be by a case-to-case basis, subject to URA’s assessment. When booking a unit, buyers should not automatically assume that they can extend the OTP via official request, even if they are “genuine upgraders”.
Did URA’s ban on OTP reissue affect your homebuying plans? Let us know in the comments below!
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