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Cash Over Valuation (COV) HDB 2024: 3 Ways To Avoid It!

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In the bustling heart of Singapore’s property market, the phenomenon of Cash Over Valuation (COV) for resale HDB flats is once again commanding significant attention.

As per HDB’s Q4 2023 flash estimates, it’s clear that the trend of climbing HDB resale prices shows no signs of abating, marking a remarkable 15th consecutive quarter of growth. The year 2023 has also set a new benchmark, surpassing 2022 with the highest number of million-dollar flats ever transacted in a single year.

This resurgence of COV, amidst an undeniably resilient property market, raises important questions and concerns for potential buyers navigating the complexities of home ownership in Singapore.

In this comprehensive article, we delve deep into the concept of Cash Over Valuation (COV), exploring its implications for both buyers and sellers in the current market. We’ll demystify the process of making an informed valuation estimate when considering the purchase of a resale HDB flat.

We’ll also provide practical insights and strategies on how prospective homeowners can navigate this complex terrain, with the ultimate goal of avoiding or minimising COV in their property transactions.

What is Cash Over Valuation (COV)?

Cash Over Valuation (COV) refers to the amount the buyer ‘overpays’ to purchase an HDB resale flat. In order words, it represents the difference between an HDB resale flat’s sale price and its actual valuation determined by HDB. HDB’s valuation is like a guiding benchmark that allows you to bargain with the seller over the property’s price.

With the growing demand for HDB resale flats, many homebuyers are paying more than the market valuation of the house, or cash over valuation (COV). The amount of COV depends on the valuation of a resale HDB flat. Keep in mind that COV applies to HDB resale flats only; it is because new flats (BTOs) purchased directly from HDB will always have the same selling price as it’s valuation.

Note that HDB resale valuation affects two crucial parameters when taking up a home loan. First is the Loan-to-Value ratio (LTV), which means the maximum amount of loan you can borrow for a hdb bank loan or directly from HDB. LTV depends on the valuation or purchase price of the HDB flat you want to buy, whichever is lower.

So, a lower valuation by HDB means the amount you can borrow is also reduced. Second is the Buyer’s Stamp Duty (BSD) to be paid when you buy a house. BSD applies to the purchase price or valuation of the property, whichever is higher.

A brief history of Cash Over Valuation

Until March 2014, COV was an expected norm in Singapore’s resale market. In those days, sellers would openly negotiate for higher purchase prices with buyers using COV as a standard rather than using the actual valuation by HDB as the benchmark. This caused a sharp hike in prices. But as COV prices got excessively high, the government decided to step in and make policy changes to curb this phenomenon.

First, it stopped publishing median COV prices in quarterly reports and removed the previous reports with COV statistics. This meant that sellers no longer had benchmarks to base their asking prices on.

Secondly, HDB mandated a new process where buyers and sellers must agree on the transaction price first. Only after the sale price has been decided and the buyer has paid the Option to Purchase (OTP) fee, the buyer or seller gets a valuation report from HDB. This implies that there was no foolproof method to ascertain in advance if COV would be part of the payment.

Today, with the newly revised resale procedures, negotiation is no longer based on COV but the total price of the resale flat. If the agreed price for the resale flat is higher than the actual valuation, the buyer will have to pay the difference.

The policy changes worked. By 2015, the median COV prices fell close to $32,000. And by the next year (2016), almost 80% of all resale HDB transactions were sold without COV.

How does Cash Over Valuation (COV) work?

Although the revised resale policy yielded favourable outcomes, COV experienced a resurgence, particularly at the height of the COVID-19 pandemic, fuelled by construction delays and an increased demand for larger homes. The recent rise in COV prices is a sign of worry as more homebuyers will have to pay the amount exceeding the valuation – and that too in cash!

Here’s the thing: growing COV will drive HDB resale prices high as the next estimate will be based on the transaction prices in the recent past. Since more homebuyers are looking at resale homes, sellers will obviously ask for higher COV based on the solid demand. Ultimately, homebuyers will have to pay more cash over valuation in order to buy and secure a flat.

How is Cash Over Valuation (COV) calculated?

The maths behind calculating COV is pretty simple. The cash over valuation occurs when the resale flats get a selling price above their actual HDB valuation. The actual property valuation of the resale flat by HDB is subtracted from the agreed sale price of the property.

For example:

Agreed sale price between seller & buyer$620,000
Actual valuation by HDB$600,000
Cash over valuation (COV)$620,000 – $600,000 = $20,000

In the example above, the buyer will ‘overpay’ an amount of $20,000.

Can COV be paid by CPF?

Unfortunately, the buyer has to pay COV to the seller in cash and upfront, hence the term cash over valuation. It cannot be paid by CPF, housing grants or loans from HDB or a bank.

How to estimate COV when negotiating HDB price?

Calculating COV is indeed simple when you know the agreed sale price and the actual valuation of the flat. However, it gets tricky when one of the two parameters for calculating COV is unknown.

After the policy changes in 2014, HDB provided the actual valuation only after the buyer agreed on the sale price and paid the option fee. In cases when the COV exceeds the buyer’s expectations or budget, the buyer might struggle to pay the COV in cash.

A question that comes to every buyer’s mind when buying a home and dealing with COV is that if they will only know the valuation after the selling price has been agreed, how can they prepare for cash over valuation?

Certainly, HDB can’t conduct the valuation process any earlier. But what you can do is try and make a reasonable estimate of the expected HDB resale valuation using your own due diligence and research.

Search and compare prices on HDB’s resale portal of other resale flats in the same estate to stay on top of the property valuation.

You may also try searching for similar resale flats in that area and check how much they have been sold for. A good understanding of the market valuation of resale flats within the vicinity can help you negotiate your deal with the property seller.

Doing everything right, you can get a realistic estimate of the market valuation. You will get a starting point for negotiations and help ensure you are not overpaying for a property as a buyer.

What happens if the valuation is lower than the offer for HDB flat?

In most cases, the valuation of an HDB flat either matches the agreed sale price or could be lower than the agreed sale price. If the HDB resale valuation is lower, the buyer has to fork out the extra cash and pay the difference, i.e. the COV, to complete the purchase, else the option fee that has already been paid will be forfeited.

On the contrary, if the HDB valuation is higher than the agreed sale price, the seller is obliged to sell at that price if the buyer chooses to exercise the Option-to-Purchase (OTP).

Is COV part of the downpayment for a resale HDB?

Please note that COV is only recognised by the buyers and sellers and is non-existent for the lender, be it HDB or a bank. They provide home loans based on the market valuation of of a 3-room HDB resale flat.

Therefore, if the market valuation is lower than the agreed resale price, the 20% downpayment (for a HDB loan) will be based on the valuation amount. It indicates that the COV is not a part of the downpayment you will make.

For example, if the agreed resale price is $550,000 and the market valuation is $500,000, COV will be $50,000 (cash). You will have to pay 20% downpayment i.e. $100,000 (based on valuation) on top of COV ($50,000).

How does COV affect home sellers?

If you are a seller, COV may help you maximise your profits and facilitate while making negotiations with potential buyers so that you never undersell your property.

However, if you are not well-informed or don’t have a good idea about the actual valuation of HDB resale, you may have to face a loss.

For instance, if the buyer and seller agreed on a price of $600,000, but the actual valuation of the flat is $585,000, it would mean the buyer will have to pay $15,000 as COV to the seller. This is your direct profit. But if, for instance, the actual valuation of the same flat turns out to be $620,000, then you still have to sell the house at the agreed sale price ($600,000). In this case, you face a loss of $20,000.

The HDB’s Q4 2023 flash estimates reveal that 15% of HDB resale flat purchasers incurred COV costs in Q4 2023, a decrease from nearly 30% in Q4 2022. Simultaneously, the rate of price increase for HDB resale flats has shown signs of slowing down.

However, making an overly ambitious offer or not having sufficient information can still result in COV. Inadequate understanding from both buyers and sellers can contribute to poor decision-making in the home-buying process.

What factors may affect an HDB flat’s COV?

HDB’s valuation of a resale flat, and hence, COV depends on several factors. Here are some of the most significant ones:

Condition

A well-maintained flat, both from inside and outside, is likely to value more in the eyes of a prospective buyer and may have a high COV. On the other hand, if the flat is in a bad condition and requires substantial renovation or restoration, it won’t appeal to a prospective buyer.

Size

Typically, the bigger the flat, the higher the expected asking price. For example, rare jumbo flats will definitely command a higher price and have a higher COV price.

Location

HDB flats in attractive locations or areas with easy access to public transport may fetch a higher valuation. Similarly, flats in the town area or vicinity of MRT stations or bus stops tend to have a higher COV price.

For example, a resale flat located in Tanjong Pagar might command a higher COV due to its close vicinity to the Central Business District (CBD). Sometimes, the remaining years of the lease also play a crucial role in the acceptance of a higher transaction price.

Amenities nearby

A prospective buyer may be ready to pay a higher price for an HDB flat with amenities nearby, such as food courts, supermarkets, sports centres, etc. Young couples with kids might also prefer a premium location more if it has good schools in the vicinity.

Scarcity

Some flat types command a higher price due to their scarcity, for example, the maisonette, which is no longer being built.

The urgency to move in

Some HDB homebuyers can’t or don’t want to wait for 3 to 5 years for a new BTO launch. Based on the buyer’s hurry to move in, a COV can rush the deal if the home seller agrees to take an above-the-usual transaction price.

Ultimately, property buyers in Singapore are looking to maximise their investment. A common concern is the realisation, after settling on a purchase price for an HDB resale flat, that they have effectively ‘overpaid’ relative to the HDB’s valuation. Let’s explore strategies to circumvent paying COV on an HDB flat.

3 ways to avoid paying cash over valuation (COV) for a HDB

Spoiler alert: you can’t really ‘avoid’ COV taking into account the high demand for HDB resale homes. However, you can surely minimise COV for HDB by doing the following things:

  1. Keep a close watch on the property market and research past transaction prices to get an estimate of the valuation of similar properties or properties in the same area or block. Examine and compare price of resale flats in the estate you want to buy a flat on HDB’s resale portal or search for similar flats in the same area for transaction history on property portals.
  2. When looking to buy an HDB resale, try negotiating for a lower deposit (option fee). If the COV is too high or out of your expectations, you can choose to forgo the deposited fees and not exercise the OTP. However, now you get the valuation report from HDB, which can help you make better decisions regarding HDB resale purchases in future.
  3. Since new flats are relatively cheaper and have the same price as the valuation (no COV!), consider applying for BTOs to be launched soon. It will let you avoid COV altogether. Although you can expect construction delays and a longer waiting time for new flats, which further push up demand for resale flats.

Tip: If you are in urgent need to find accommodation, consider renting a house. This will give you time to deal with your financial matters about purchasing a new home and prepare to pay for a large difference in your HDB purchase.

Should I pay cash over valuation (COV) in 2024?

If you can fork out COV in cash, paying COV might not be bad at all. Believe it or not, the growing affluence of Singapore households is one of the reasons behind the rising COV trend in the resale market since 2020. The median monthly income for Singapore households has increased from $5,600 in 2010 to $7,744 in 2023, a significant 38% increase!

Many buyers are willing to pay COV to get their choice of resale property because delays in the construction schedules of new BTO projects have become very common. Also, a lot of buyers have urgent housing needs, which is why they are usually ready to expedite the sale process by paying some amount above the valuation.

As a buyer, you should consider paying COV in the following situations:

  • If you are in a rush to buy and secure a home and prepared to pay above the property valuation.
  • If you are convinced that the COV is worth paying for the resale flat you want to buy, considering its excellent location or easy access to world-class amenities.
  • Ask yourself “how much COV should I pay?” COV for resale HDB flats available in mature estates can range from $10,000 to $50,000 as they are in high demand. But HDB resale flats in some prime locations have also seen COV going as high as $100,000 to $200,000 and even more. Therefore, based on your financial means, decide for yourself how much COV you can afford to pay.

2024 Forecast For COV In Singapore’s Resale HDB Market

A November 2022 study highlighted that one in four HDB resale flat purchasers paid more than the market valuation in 2022, a concerning trend albeit an improvement from 2021, where the ratio was one in three.

On January 15, 2024, the Minister of National Development, Desmond Lee, revealed that the incidence of buyers paying cash-over-valuation (COV) for resale flats declined in 2023 compared to 2022.

The growth rate of HDB resale prices cooled, dropping from 10.4% in 2022 to 4.8% in 2023, according to preliminary estimates. This slowdown in Singapore’s property market is anticipated to persist due to ongoing global geopolitical challenges and the expectation that domestic mortgage rates will stay elevated for a while. These factors could influence both current homeowners and potential buyers.

A decrease in resale prices generally leads to lower COV rates. As the market stabilizes, the urgency to pay significantly above valuation diminishes, possibly resulting in a market more favourable to buyers.

The current trend indicates that unless a resale flat offers distinct advantages—like a prime central location, unobstructed views, a high floor, or a unique loft design—buyers are becoming less willing to pay premium prices and COV.

This year, we might witness a shift in the negotiation dynamics favouring buyers, potentially creating a more accommodating market with increased options and bargaining power for them.

Sellers, on the other hand, may need to recalibrate their sale price expectations for 2024. With price growth moderating, achieving high COV figures like those seen in more bullish times could become more challenging.

Final Thoughts

If you are not convinced about the unreasonably high price of a particular property, consider giving it a miss and look for another property that looks more practical from a monetary aspect.

At Dollarback Mortgage, we understand dealing with the hassle of COV amidst home loans and other financial processes when buying a new home can induce anxiety regarding cash outlay and may disturb your financial planning.

Get the support you need while making some of the biggest financial decisions of your life, and find the answers you are looking for by contacting us for a free consultation.

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