Exercising the Option to Purchase (OTP) is a major step on any home buyer’s journey. Once the OTP has been issued by the home seller, the buyer will be granted exclusive rights to purchase the home at a pre-approved price.
Because the OTP is legally binding, buyers are obliged to exercise their option 21 days after the contract is issued. Buyers who fail to do so will forfeit their option fee deposit, as well as their exclusive claim to the property.
How much will buyers lose if they back out during the option period?
Buyers and sellers enter a 21 day period known as the option period once the OTP is issued. While this duration is usually fixed for HDB flat purchases, it can vary from anywhere between 14 days to several months for private property transactions, depending on how negotiations pan out.
But buyers must pay an option fee deposit before they can receive the OTP. For HDB flat buyers, this deposit ranges from anywhere between $1 to $1,000. This may not be a huge amount of money in the grand scheme of things, but you still don’t want to lose your money unnecessarily. Keep in mind that buyers will have to repay the option fee if they let their existing OTP expire.
The stakes are much higher for private property buyers, where option fees typically cost 1% of the property’s purchase price. If you’re buying a condominium at $2 million, that means forking out a staggering $20,000 for OTP alone! You can definitely haggle with your seller to lower the price, but that’s the ballpark figure that we’re looking at.
Buyers will therefore want to be certain of their purchasing decision prior to entering the option period. This is definitely not the time to be window shopping for homes.
With so much on the line, why do home buyers still back out of OTP agreements? Well, signing on the OTP is a major commitment. There’s actually a ton of documentation that buyers have to settle before they can commit to buying a six or seven figure home.
5 things home buyers must do before signing the OTP
Read on to prepare yourself for this crucial stage of the home buying process and avoid being stuck between a rock and a hard place.
1. Do your research
Nobody wants to realise 30 years down the road that they’ve lost hundreds of thousands of dollars thanks to their home depreciating. The 3 week option period allows home buyers to determine whether or not they’ve chosen the right home to invest in (although this step should really have been done before you received the OTP, sometimes it’s better to cut your losses and move on instead of getting into a bad deal).
There are a ton of free home valuation tools that you can use online, including Ohmyhome’s free home valuation report. Because no one can predict how the market will perform in the future, it’s always better to get a second or third opinion about how the property you’re buying will perform.
If you’re looking to estimate the value of the home for yourself, know that home prices are typically pegged to the following criteria:
- Urban Redevelopment Authority zoning
- Number of rooms
- Age and condition of the property
You can also tap into past records of resale transactions within the area, which your property agents should be able to get a hold of. Be sure to do your market research thoroughly, or you’ll be losing a lot more than just your option fee.
2. Lock in an ideal home loan package
It is important to have a loan locked and loaded before signing the OTP so that you’ll have enough cash to handle the bevy of payments to come.
Loans aren’t one of those things that you can just walk into a bank to collect, so don’t wait until the last minute to do this. Apart from considering your monthly income, savings, and existing debt, you’ll also want to determine:
- Whether you’re taking a loan with floating or fixed interest rate.
- Who your joint borrower should be for an optimal Income Weighted Average Age (IWAA), or if you even want a joint borrower in the first place.
- The amount that you are eligible to borrow based on your MSR and TDSR.
Crunching all these numbers that will determine your financial situation for the next 20 to 30 years can be understandably tedious and stressful, especially when you have to juggle a full time job and family commitments.
Thankfully, Ohmyhome has a free mortgage advisory service that helps home buyers compare home loan packages across all banks to identify ones that best fit their financial situation.
3. Secure your cash for upfront payments
We weren’t kidding when we said that there will be a ton of things to pay for, which is why we recommend that buyers secure their loans within the first week of the option period.
The following table provides a rough estimate of how much cash buyers will have to prepare upfront:
|Buyer’s Stamp Duty (BSD)||BSD varies depending on the selling price of your property. BSD will cost approximately $9,600 for a home priced at $500,000. The full breakdown on BSD pricing can be read here.|
|Additional Buyer’s Stamp Duty (ABSD)||ABSD kicks in if you’re a Singaporean Citizen buying your 2nd residential property or a foreign buying a residential property. ABSD rates have been increased as of 15 Dec 2021.|
|Legal Conveyancing Fees||Conveyance lawyers assist buyers with the legal aspect of property transactions. Conveyancing fees typically cost between $2,500 to $5,000, but buyers can get conveyance services from $1,800 with Ohmyhome.|
|Property Agent Fees||Property agent fees typically cost between 1% to 5% of the property price.|
|Fire Insurance||All HDB flat owners are automatically signed up for HDB fire insurance. The cost is negligible at several dollars over five years. But fire insurance does not cover your furniture, appliances, and personal belongings, which must be covered by home contents insurance.|
|Exercise Fee||For HDB flat buyers, the exercise fee and option fee should not add up to more than $5,000.|
|Downpayment||Downpayment percentage varies depending on your loan-to-value limit, which is determined by your age and loan tenure. It can range from anywhere between 5% to 25% of your property’s purchase price. The full breakdown can be seen here.|
|Renovation Costs||Renovation costs vary greatly depending on how extensive your reworks are. But be prepared to set aside at least a five figure sum if you plan to give your entire house a makeover.|
4. Research on renovation costs and providers
To make sure that your renovation loan does not go out of hand, always ensure that you do not take out more than a maximum of $30,000. Furthermore, you should cap your loan at six times your monthly salary, especially if it does not exceed $30,000.
Keep in mind that this will be an additional loan on top of your main, larger home loan that you’ll be paying for. So we suggest keeping renovation works to a bare minimum, fixing only what is necessary, as much as possible.
We understand that you might be hyperventilating from the thought of facing all these super expensive bills at this point. That’s understandable, because getting a home really shouldn’t be this expensive. Excuse the self-promo, but Ohmyhome’s renovation packages are truly more affordable than what’s out there.
5. Get a valuation report from HDB or your property agent
Getting your home valued by HDB is a mandatory process for buyers who wish to take out home loans from HDB or private banks.
On the flipside, you may be spared from forking out tens of thousands of dollars if the final valuation is higher than the selling price. Your sellers will be the one doing that instead. But such instances are rare, so don’t count on it.
Buyers can minimise their chances of paying an exorbitant amount for COV by seeking out expert advice from property agents. While no one can see into HDB’s valuation crystal ball, property agents are still the ones best equipped to make educated guesses based on their vast libraries of past HDB valuation reports.
You can also get a rough estimate of your home’s valuation through Ohmyhome’s free e-valuation service. But keep in mind that this is not a substitute for official appraisals. HDB’s final valuation will still stand.
Make sure that you’re always getting the best deal for your HDB or private property
Buying a home is already expensive, so minimising miscellaneous costs along the way is essential to ensuring that you don’t break the bank.
What’s more, you can find a home that fits your financial needs the smart way with Ohmyhome’s data-matching technology. Simply submit your preferences and let our algorithm MATCH you with a home that you can afford.
So don’t hesitate to reach out for financial advice and consultations on home ownership. As home owners ourselves, we’re ready to share everything that we know to help you on your journey. Because at Ohmyhome, we’re always by your side, always on your side.
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