In Singapore, home ownership currently stands at about 90%. Among these homeowners, about 8 in 10 are living in HDB flats.
Beyond just finding an HDB flat that they like, and understanding the various HDB grants they may qualify for, potential home buyers of resale flats need to be aware of how HDB valuation works. Similarly, as a seller of an HDB flat, HDB owners must be aware of how HDB valuation could affect the sales of their flats.
When buying a property, there is typically a valuation that needs to be done. The valuation will determine how much the bank/financing entity will be willing to lend you for the purchase of the property.
Put simply, you can’t sell your 1-bedroom condo to your parents at a GCB-level type of price thinking that this would be an easy way to get access to cheap financing. It doesn’t work that way. The bank will send a valuer to assess the value of your property. Thereafter, the bank will base its Loan-To-Value (LTV) on the valuation of the property, or the purchase price of the property, whichever is lower.
For example, if you buy a property for $1,050,000, you may think that you can borrow 75% of the LTV. But if the property is valued at $1,000,000 by the assessor, then you will only get a loan of up to 75% of $1,000,000, and not the purchase price of $1,050,000.
The end result is that you will need to pay a higher down payment for your property.
What HDB Valuation Is?
When it comes to buying an HDB flat, HDB is the valuer of the flat. This applies regardless of whether you take an HDB housing loan or a bank loan. It essentially means all HDB resale transactions have to be individually valued by HDB first before the sales can proceed.
Similar to private residential properties, if the resale price of the flat is higher than the HDB valuation, then the difference between the valuation and the resale price has to be paid for using cash only.
This is also known as the cash-over-valuation (COV), which is a term that you may be familiar with if you have been house-hunting for an HDB flat. COV also applies to private properties as well.
HDB Valuation Can Only Be Obtained After The Option-To-Purchase (OTP) Has Been Granted
The key difference between valuation for an HDB flat and private property is that HDB would require the Option-To-Purchase (OTP) to be issued to the buyer before a valuation request can be made. Only the buyer (or their salesperson) can request for the HDB valuation after they have secured the OTP from the seller.
In other words, you need to agree upon the price of the HDB flat first, before you request and receive an HDB valuation. This is unlike private properties where both buyers or sellers can request a valuation prior to making an offer, or even before listing their properties for sale.
How HDB Valuation Can Affect Transactions
Prior to 2014, HDB sellers can, and usually would obtain the valuation for their flat before selling it. Doing so was logical for the sellers because this increases the certainty they offer when selling their flats to potential buyers since the buyers will know exactly how much they can borrow, and what is the COV that they will need to pay should they agree to the sellers’ asking price.
The problem (back then) was that it created a situation where sellers end up using the HDB valuation to negotiate for higher prices for their flat. For example, in a previous article we wrote, one of the highest COVs recorded was for an HDB executive maisonette in Bishan sold in December 2013 with a COV of $250,000 and a resale price of $1.05 million.
To overcome this, HDB decided to change its process such that valuation is done only after the OTP has been secured, and not before it. The thought process behind this is that buyers and sellers should agree on whatever price they want to transact at, without being influenced by what the HDB valuation is.
This sounds reasonable on paper. After all, why should HDB valuation matter in a willing buyer, willing seller transaction?
However, the problem is that HDB valuation can still affect transactions even though it’s done only after buyers and sellers have agreed to a price. This is because there is an element of uncertainty involved in the transaction now. For example, if the agreed-upon price for a 5-room flat is $600,000, and the HDB valuation is $550,000, it means that the buyer would need to fork out a COV of $50,000, on top of the usual down payment of 25%, of which 5% have to be paid for using cash.
Scenario 1: Assuming HDB Valuation is $600,000 for a flat that is purchased for $600,000. Minimum cash down payment required, 5% of $600,000 = $30,000.
Scenario 2: Assuming HDB Valuation is $550,000 for a flat that is purchased for $600,000. Minimum cash down payment required, 5% of $550,000 = $27,500 + $50,000 (COV) = $77,500.
Even though the selling price of the HDB flat is similar in both scenarios, the buyer has to pay $47,500 more in cash for scenario 2. For buyers who are cash strapped, it’s easy to see how the transaction can fall apart when the HDB valuation and the selling price of the flat are too far from each other.
A failed deal due to HDB valuation being too low as compared to the agreed-upon selling price creates problems for both buyers and sellers. For buyers, they can choose not to exercise their OTP but this would mean losing their $1,000 deposit. For sellers, it creates a level of uncertainty because they know that their buyers may still pull out even the HDB valuation is too low. This means they can’t assume that the buyer will surely exercise their OTP as forfeiting the $1,000 deposit may be preferred by the potential buyer as compared to having to pay a high COV.
The HDB valuation also forces buyers and sellers to not only think about the price that both parties are willing to agree upon but also what HDB valuation is. One way to get a gauge of what HDB valuation is would be to look at recent transactions among similar-sized HDB flats in the same area. If most transactions are happening at $550,000 or lower, then it may be challenging to get a valuation of $600,000 or more, even if that is the price that both buyers and sellers are happy with. And if both buyers and sellers are aware of the information, it does, to some extent, provide downwards pressure on HDB flat prices since the parties cannot simply transact at whatever price they want without taking into consideration the valuation they may get.
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