The new restrictions on reissuing Options To Purchase (OTPs) by developers have been the talk of Singapore’s property scene lately. But what is the reissuance of OTPs? How did it come about? And what do these new restrictions mean for us buyers of property? We will explore some of these topics today, and hopefully, you will leave this page with a clearer picture of what happens between property buyers and sellers in Singapore’s property market.
What are OTP agreements and what are they used for?
Before we go into the reissuance of options to purchase, we will have to talk about what OTPs are in the first place. Let’s say that you, as a property buyer, have just decided to buy a residential property in Singapore. Once you and the seller have agreed on a price, and you have given a cheque as consideration, you will receive a document – an Option-To-Purchase agreement. That agreement means a couple of things:
That you have officially declared your intent to buy the property at the agreed-on price.
That you have paid an option fee to the seller. This fee makes sure that your seller will not sell the property to another person until the OTP agreement expires.
So in short, an OTP agreement is exactly as its name implies – it gives the buyer the option to purchase the property within a certain period of time. Within this period of time, the buyer is guaranteed to get the property if he or she goes through with the purchase. And if the buyer decides not to buy the house instead, the option fee will be forfeited, and the property goes back up on the market.
The use of OTP agreements goes way back to ancient times, where buyers needed to “book up” goods and merchandise for future use. Back then, OTP agreements were mainly to protect the buyer’s interests – to make sure they could get the goods they needed, at the quality of the first sample. Today, though the idea behind OTP agreements is more about giving buyers more time to decide on a purchase. Say, for example, if a buyer really wanted the property and could afford it just fine, but needed a little more time to get the necessary loan approvals to seal the deal. But to protect the seller’s interests, the option period is usually not long – usually about 2 calendar weeks for private properties– after which the option will lapse and the sellers can continue showing their property to other potential buyers.
Why would anyone want to reissue the OTP?
It does happen, though, that buyers still need a little more time to finalise the purchase when the OTP agreement expires, for e.g. selling off their existing property before exercising the purchase of the new one, to avoid paying Additional Buyer Stamp Duty (ABSD) first.
In a case of a Building Under Construction (BUC) project, some property buyers may request for more time (with reissued OTPs) so that they can have a longer time in selling their property and making the necessary arrangement in finding an alternative housing before the new property is completed and ready for occupation.
And so, sellers or developers especially, would reissue the OTP to give the buyers more time to get matters handled.
Restrictions of reissuing the OTP and what this means for the property market
Starting this September 2020, the Urban Redevelopment Authority’s (URA’s) new restrictions on reissuing OTPs will take effect. Sellers and developers won’t be able to reissue OTP agreements to the same potential buyer for the same property so easily anymore. In fact, when an OTP agreement expires, the residential property sellers will not be able to issue the same seller another OTP agreement for the same property until a full year has gone by.
But the new restrictions doesn’t mean the OTP period is completely inflexible – it’s just less simple. Yes, sellers can no longer be as quick to offer the reissue of an OTP, but if a buyer genuinely needs more time to move ahead with the purchase, for some reason, they can still apply for an extension of an OTP agreement for up to about 3 months. Of course, both the buyer and the seller would need to agree on the extension date, and state the reason for extending the OTP when they submit their request to URA.
What does this mean for Singapore's property market?
As would happen with any change to the market dynamics, the property market does have a few concerns about the new restrictions. So what are the main concerns about what will happen with the new measures in place?
1. Prudence for buyers / investors
The shorter deadline was placed to encourage buyers to plan their purchases more carefully. Knowing that once they sign an OTP, there is a hard deadline of 3-4 months tops, the buyers may not be so quick to sign an OTP agreement unless they are absolutely sure that they can get all the finances ready within the time period. This makes sure buyers don’t make an impulse purchase, and risk losing their option fee deposit from the OTP agreement.
Property investors will also need to research their investment decisions early and more carefully, since once they sign an OTP, they don’t have the luxury of more time to monitor the property trends. Going without the OTP while eyeing a property for a year probably won’t work either, and so we arrive at our next point.
2. More urgency for buyers / investors
There is another downside for buyers. With OTPs being harder to come by, there’s a greater urgency to get the necessary finances needed faster when buyers see a promising property investment. Without the OTP agreement, the seller is free to look for better offers from other prospective buyers – so the property might not be on the market for much longer! This might lead to buyers taking housing loans at an impulse just to meet the financial demands, or taking unnecessary financial risks to make a quick buck.
3. Possible lower prices of homes
Because buyers may be less willing to commit to signing an OTP to begin with, some developers have grown worried that they may need to reduce their prices to “lock in” deals earlier. Some may also be concerned that with a possible increase in supply of property launches, new launch property prices would be driven down further.
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