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Option To Purchase (HDB & Private): What Is It & Exercise Fees?

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Anybody buying a new private property or a resale HDB in Singapore would have probably heard about OTP or Option to Purchase. In the real estate industry, signing an OTP is a major commitment when purchasing a residential property in Singapore. However, many people are confused about whether signing an OTP means that they have bought the house.

In this article, we will discuss what an OTP is, the importance of an OTP in buying a property, and whether signing an OTP means buying the property.

What is an Option to Purchase for HDB and Private Property in Singapore?

An OTP, or Option to Purchase, is a valid legal agreement signed between the prospective buyer and the seller outlining the terms and conditions for a property sale. Under the OTP agreement, the prospective buyer gets the option to purchase a property at an agreed-upon, pre-approved price.

Since there may be multiple prospective buyers pursuing the same property, the one who is granted the OTP by the seller reserves the right to buy it within a given timeframe. The seller is obligated to sell the property to that particular buyer (and not anyone else) if they decide to exercise the OTP within a specified timeframe.

Please note that an option to purchase is not a buyer’s obligation. This means a buyer can secure more than one OTP even if they have no intention to exercise all OTPs they have paid for. On the contrary, a seller can’t issue two OTPs to two different buyers at any point in time.

What is a standard Option To Purchase (OTP) in Singapore?

A standard OTP agreement typically includes, but is not limited to, the following information:

Property details. The address of the property to be sold, including its location, size, and other relevant information.

Purchase price. The property’s purchase price indicates the amount the seller has agreed to sell the property.

Option period. It specifies the timeframe within which the buyer can exercise the option to purchase the property.

Payment terms. It specifies the payment terms, including the deposit amount and the payment schedule.

Other terms & conditions. It may include the terms and conditions, such as the seller’s obligation to repair defects in the property before the completion of the sale.

Please note the seller must have the legal ownership of the property to issue a valid OTP.

How long is the option to purchase valid in Singapore?

The option to purchase is valid for a fixed period, known as the option period, as discussed above. During the given option period, the seller cannot sell the property or issue another OTP to any other potential buyers, while the buyer must decide whether or not they want to go ahead with the purchase within this timeframe.

For private properties, the option period is typically valid for 14 days but can be negotiated for a longer duration (up to 2 months) if both parties agree. During this period, the buyer would secure a mortgage loan to finance their property purchase, and the buyer’s lawyer should conduct legal requisitions on the property.

For HDB flats, the option period is fixed at 21 calendar days. This includes weekends and public holidays.

You should use the option period wisely and not just rush into exercising the OTP before considering all aspects of buying a particular property.

How much is the option fee for HDB and private properties in Singapore?

After you sign an OTP, the prospective buyer is required to put down a small deposit, known as the option fee, to the seller.

For private property transactions, the option fee ranges between 1% to 5% of the purchase price. While it is usually 1%, some sellers may ask for a 5% deposit because they don’t want the buyer to back out of the purchase at the last minute.

A higher option fee assures the seller that the potential buyer will not back out at the last minute and forfeit the option fee deposited. In some cases, the buyers and the sellers may mutually agree to a longer option period in return for a higher option fee. However, the buyer can try negotiating the deposit amount to 1%.

For HDB properties, you should not be paying anything above $1,000. The fee ranges between $1 and $1,000, to be mutually agreed upon between the buyer and the seller.

Although the $1,000 option fee is still a significant amount, there is a higher probability that a buyer might back out and forfeit their option fee if they find a better deal elsewhere.

Note that the amount deposited (as an option fee) should be kept in an intermediary account until the completion of the sale.

Is the option fee refundable in Singapore?

No, the option fee is non-refundable if you decide not to exercise the option to purchase and let the option period expire. In such cases, the option fee deposited to the seller is forfeited. Therefore, buyers should be sure about their purchasing decision before entering the option period.

However, if a seller backs out after signing the option to purchase, the seller has to refund the option fee to the buyer.

Is the option fee part of the purchase price?

Yes, the option fee serves as part of the downpayment of the property once you exercise the option. For example, if you exercise the OTP for a 4-room HDB flat worth $600,000, the $1,000 option fee have already paid is considered a part of the flat’s purchase price.

Note that the option fee for various housing types is payable in cash only since you are prohibited to use your CPF savings for it.

What is the difference between an Offer to Purchase and an Option to Purchase in Singapore?

Since both terms – Offer to Purchase and Option to Purchase – are sometimes referred to as the OTP and come in quick succession, it is not uncommon that buyers sometimes mistake one for the other. Therefore, it is good to know the difference.

The Offer to Purchase is a formal letter from the buyer to the seller that indicates a serious intent to purchase the property. However, it is not considered legally binding.

Often drafted by the buyer’s agent, the offer to purchase specifies the terms of the subsequent option to purchase. While not mandatory, it is always a good idea to draft and send an offer to purchase to the seller when buying a property. It usually comes with a cheque — usually 1% of the purchase price as an option fee — to use for the option to purchase.

The seller may issue the option to purchase to the buyer upon accepting and signing the offer to purchase. If the seller rejects the offer to purchase, or the validity period (option period) lapses without an option to purchase, the seller must return the option fee.

The Option to Purchase is a legally binding document, usually drafted by the seller’s lawyer for the buyer purchasing private property. Buyers looking to buy a HDB flat can use the form prescribed by HDB. The buyer’s lawyer will then review the OTP agreement and may request to amend and re-negotiate some of the terms specified in the option-to-purchase agreement.

When all the terms are agreed upon, the seller signs the offer to purchase and issues a copy to the buyer. Only then the buyer pays the option fee. If the buyer does not exercise the option to purchase within the validity period, it leads to the forfeiture of the 1% deposit.

While both documents serve a similar purpose, it is crucial to understand the differences between them to ensure you are using the correct one for your property transaction in Singapore.

Can I back out of OTP if I change my mind?

If you have paid the option fee but later change your mind and decide not to exercise the option to purchase, you will have to forgo the option fee deposited unless the OTP specifically states otherwise.

After the option period expires, the seller reserves the full right to keep the option fee and is free to sell the property to another buyer. While there are no legal consequences, and the seller can’t sue you for not exercising the option, buyers should consider carefully before entering an OTP.

For a private property that costs, say $1.5 million, you will have to forgo an option fee of at least $15,000, which is by no means a small amount for most of us.

Can the seller cancel an option to purchase?

Generally, the seller cannot cancel the OTP once granted. But if the seller still withdraws the deal and sells the property to someone else during the option period, you can sue the seller for breach of contract.

In most cases, you will receive a refund of the option fees at the very least. You may also be able to push the seller for specific performance and carry through their contractual obligations under the OTP. However, you must discuss the best legal recourse with your lawyer before taking action.

To grant specific performance, the court may consider the conduct of parties to decide whether it would be unfair to allow the buyer and seller parties to go back on their obligations.

When should I exercise OTP?

Exercising the option means that the buyer has legally agreed to purchase the property and cannot pull out of the property transaction.

Therefore, you should only exercise the OTP when you are 100% sure about buying the property and that you qualify for a bank or HDB loan for it.

With merely 14 days (or 21 days for HDB property) to get a home mortgage loan, many homebuyers may find themselves in a tight spot realising that they are not eligible for a mortgage loan or the loan quantum they were hoping for due to certain loan restrictions. In such situations, you will have no choice but to forfeit the option fee for being unable to exercise the OTP due to a lack of financing options.

To save yourself from financing troubles, you should have a good idea about your mortgage eligibility and the amount you can borrow, whether you are planning to take up a HDB loan or a bank loan.

If you are taking up an HDB loan

If you decide to go with an HDB housing loan, you must obtain a valid HDB Loan Eligibility (HLE) letter before the seller grants you the OTP. That eligibility letter will be applicable for six months from the issue date. Note that you can seek the Request for Value from HDB only after the seller of the property has granted you the OTP.

If you are taking up a bank loan

If you are going to take a home loan from a bank or financial institution, you will need a valid Letter of Offer (LO) before exercising the OTP. You must return the signed OTP, pay the option exercise fee to the seller and submit your portion of the resale application.

Read more: 6 reasons why cash is better than CPF for your housing loan in Singapore

If you are neither taking up HDB nor a bank loan

If you not taking any housing loan, you don’t need to obtain an HDB’s Loan Eligibility letter or the bank’s Letter of Offer. However, you must indicate that you are financing your property purchase fully with your CPF savings and/or cash to your conveyancing lawyer.

What happens when you choose to exercise the OTP?

You will need to sign the acceptance copy and pay the balance of the purchase price, known as the balance deposit, of the property.

For private properties, the balance deposit can be negotiated between parties but is usually 5% or 10% of the purchase price minus the option fee paid. Usually, the balance deposit is paid to an intermediary party, such as the Singapore Academy of Law.

Subsequently, both you and the seller will agree on a date of completion for the sale transaction – typically 10 to 12 weeks from the date of signing the OTP.

For HDB flats, you need to have a witness (who could be a property agent, not involved in the resale transaction) when exercising an HDB OTP. The balance deposit cannot exceed $5,000, including the $1,000 option fee already paid.

Both the buyer and seller must submit their resale application to HDB within the agreed number of days, as indicated in the OTP agreement.

What happens after signing the OTP?

After exercising an OTP within the option period, the buyer enters a Sales & Purchase Agreement (S&P) with the seller.

The buyer’s lawyer will then lodge a caveat on the property title. It is an official notice of interest on the property, which would prevent the seller from conveying the property title to another buyer. It is a precautionary step, not mandatory, taken by the buyer to protect their interest in the property transaction and ensure that no other person has prior rights to the property.

Once the S&P agreement concludes, the seller will hand over the keys to your property with the property ownership transfer documents to your lawyer. This will allow your lawyer to apply for a Certificate of Title with the Singapore Land Authority (SLA). Note that the seller must deliver the property in the same condition as on the date of signing the OTP unless otherwise agreed between both parties.

Both parties should pay the property stamp duties within 14 days of exercising the OTP. If you own more than one property, you must take the Additional Buyer’s Stamp Duty into account as well.

Does signing an OTP mean you are buying the house?

Although signing an OTP is a crucial step towards buying a house, it does not mean you are obliged to do so. If you have only signed the OTP without exercising it, the consequences are less devastating. It only means you had reserved the exclusive right to buy the house, and you can still back out of the sale by forgoing your 1% option fee deposit.

If you have already exercised your option to purchase, i.e., paid the exercising fee (additional 4%), then it is a more problematic scenario. At this stage, the seller may take legal action against you for failing to complete the sale transaction.

Such situations will need you to confer with your lawyer or another legal firm as it typically requires you to negotiate with the seller to rescind the transaction or cover costs incurred due to failure of the deal from your end.

To avoid such critical situations, it is advised to obtain Approval In Principle (AIP) while working closely with your conveyancing lawyer when drafting the OTP. It will help minimise the odds that could put you in a tight spot after putting down the option fee.

Final Thoughts

Preparing and entering into an OTP can be complex as it may involve several drafts and lengthy negotiations between parties. As a buyer, it is essential for you to fully understand the terms and conditions as stated in the contract.

Remember that the seller is not obliged to amend the terms of the option to purchase once you have signed the agreement and paid the option fee. Do your due diligence to inspect the property and conduct legal checks before signing the OTP.

It is based on the legal principle of “Caveat Emptor” (Latin for “buyers beware”). It places the responsibility on the buyer(s) to ensure that the property to be purchased is free of defects or within your knowledge.

The sellers and property agents have no legal obligation to disclose all information to the buyer and ensure the property is in good condition. Also, it is advised to seek legal advice before entering or exercising an option to purchase.

If you plan to buy a home by securing a loan, don’t wait until the last minute. Securing a home loan takes time. You should get your housing loan within the first week of the option period, so plan accordingly. Get in touch with one of our experienced mortgage specialists to help you on your home purchasing journey.

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