For anyone buying a property in Singapore, you would need to be familiar with the term Option To Purchase. Known as OTP for short, an Option To Purchase (OTP) is a legal agreement given by the seller of a property that gives the buyer the option, but not necessarily the obligation, to purchase a property at an agreed-upon price.
Basic Information Required For An Option To Purchase (OTP)
The Option To Purchase (OTP) is issued by the seller of the property to the prospective buyer. It outlines a few key information that the seller of the property is granting the buyer.
Address of the property: The OTP needs to indicate the address of the property. The seller must be the legal owner of the property to issue the OTP.
Purchase price of the property: This indicates how much the seller has agreed to sell the property for.
Option period: The indicates the validity of the option period. For HDB flats, this will be 21 days. For private properties, this is usually 14 days but can be negotiated to be a longer duration if both parties agree.
Option fee: For private properties, the option fee is usually 1% though this can be negotiated. Sometimes, buyers and sellers may negotiate to allow for a longer option period in return for a higher option fee. The higher option fee assures the seller that the buyer is unlikely to back out of the purchase as they would need to forfeit their option fee.
For HDB flats, the option fee cannot exceed $1,000. Do note that the option fee is 1) non-refundable and 2) serves as part of the purchase price of the property. For example, if you buy an HDB flat for $500,000, the $1,000 option fee is part of this purchase price should the option be exercised.
Also, for HDB flats, you can only seek an HDB valuation request after the seller has granted you the OTP.
For private properties, the OTP agreement should be drafted by the seller’s lawyer. For HDB flats, you can use the form prescribed by HDB.
Witness: A witness will be required for the OTP. This can be a salesperson or anyone who is a Singapore citizen or PR, aged 21 and above. The witness cannot be involved in the transaction.
Sellers Can Only Grant One Option To Purchase (OTP) At Any Point In Time
If it’s not already apparent by now, a seller can only grant one OTP at any point in time to one buyer. As a seller, you can’t issue two OTPs to two different buyers because you are obliged to sell your property at an agreed-upon price to the buyer if they exercise the OTP. You issue the option in exchange for the option fee.
On the other hand, there is nothing wrong with a buyer securing multiple option-to-purchase (OTPs) even if they have no intention to exercise all the OTPs they have paid for. As mentioned above, an option gives the buyer the right, but not necessarily the obligation, to purchase the property.
For private properties, it’s less likely that a potential buyer will back out from the purchase of a property because the option fee is usually at least 1% of the purchase price. Assuming a private property sells for $1 million, this means the option fee will be at least $10,000, which is a significant amount.
For HDB flats, however, the maximum option fee is only $1,000. While $1,000 is still significant, there is a greater probability that a buyer may still back out from a transaction if they can find a better deal elsewhere, and to forfeit the $1,000 option fee.
Remember, only a buyer can back out from exercising the OTP. The seller cannot rescind the OTP once it’s granted.
Exercising The Option To Purchase (OTP)
Within the option period, the buyer can choose to exercise the OTP. For private properties, this is usually 4% of the sales price. Along with the option fee (1%), this would form the balance deposit which is typically 5%.
For HDB flats, the balance deposit cannot exceed $5,000. This includes the option fee that has been paid ($1,000).
Once the option has been exercised, the buyer has legally agreed to purchase the property and cannot back out from the property transaction.
Selling An HDB Flat And Upgrading To A Private Property
One of the most common property transactions that take place in Singapore are HDB owners selling their HDB flats to upgrade to a private property. For such transactions, when the option is exercised is vital to determine whether or not Additional Buyer’s Stamp Duty (ABSD) needs to be paid.
As explained by IRAS, a property is excluded from the count of properties owned by a buyer if there is already a contract or an agreement to sell the property and the new buyer has executed his option to buy a property.
In other words, if the buyer of your HDB flat has exercised the option, then the property is no longer considered as a property that you own and excluded from the count of properties.
This means that to avoid ABSD, you have to ensure that the buyer of your property has already exercised their option before you can exercise your option to purchase a private property.
Special Conditions Should Be Included In The Option To Purchase (OTP)
Whether you are the buyer or seller, if there are any special conditions that you want to include as part of the transaction, this should be reflected in the OTP. For example, if the property sale comes with tenancy, or you require an extension, this information should be included in the OTP. Similarly, if you want to move in earlier, have the right to inspect the property, or would like the current owner to remove some structure before you take over the property, these conditions should be reflected in the OTP.
This article was first published on 30 Sept 2021 and updated with the latest information.
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