You found the perfect place for your new home, you exercised the Option To Purchase (OTP) and then to your horror, you find out that the valuation is lower than the agreed price with the seller and the bank is not willing to loan you the extra amount.
This situation could have been avoided by knowing the indicative or actual valuation of the property prior to making your offer.
Valuation is the appraised market value of a property and it is an integral part of a property transaction in Singapore. Here is what you need to know about property valuation and what happens when you buy a property that is above or below valuation.
Valuation Affects Your Property Financing
Knowing the valuation of the property is important because it affects your ability to finance the property, namely the amount of loan you can borrow and the amount of buyer’s stamp duty you must pay.
This is because the maximum amount that the bank or any financial institution can lend you for a property purchase is capped by the Loan-To-Value (LTV) limit, which is a percentage of the property value (not the property selling price).
Thus, the higher the valuation, the more you can borrow.
Valuation also affects the amount of buyer’s stamp duty (BSD) you must pay. The BSD is calculated based on the purchase price or market value of the property, whichever is higher.
Thus, the higher the valuation, the more BSD you must pay.
Valuation Is Conducted Before Or After The Option To Purchase
While you can check the approximate valuation of the HDB or private property you are intending to purchase through e-services such as URA’s Private Residential Property Transactions e-service and HDB’s Resale Flat Prices e-service, these are only indicative valuations.
The actual valuation that banks use to determine the LTV has to be conducted by third-party professional valuers for private property, while HDB has its own panel of professional valuers who conduct the HDB valuation.
For new properties, the developer’s asking price for private property and the selling price of a new HDB flat is taken as the valuation.
To minimise uncertainty regarding the valuation and the financing, buyers should have a clear idea of the valuation prior to making the offer and signing the option to purchase.
For private property, this can be done relatively easily as buyers can request for a valuation (at their own expense) before making an offer for the property.
However, for resale HDBs, the valuation must be done by HDB and the buyer may only request for an HDB valuation after the option to purchase has been signed and submitted. This can create a situation where the selling price is unexpectedly higher or lower than the valuation.
The Buyer Needs To Pay Cash Over Valuation (COV) If The Property Price Is Above Valuation
If the property selling price is above the valuation, you have to make up the difference in cash in order to purchase the property or forfeit your option fee.
As your loan amount is capped at the valuation, you have to pay cash over valuation (COV) even if you had the In-Principle Approval (IPA) for a larger home loan.
For example, you and the seller have agreed on the selling price of $1 million, and your IPA is up to $1.1 million. However, the valuation of the property is $950,000. This means that you will need to pay a COV of $50,000 to purchase the property and this amount cannot be borrowed through your home loan.
The Seller May Need To Top Up CPF If The Property Price Is Below Valuation
In the rare situation where the property is selling for below valuation, the seller(s) will need to top-up their CPF in cash if they had financed the property using CPF. This is because CPF requires that you refund the principal (P) used to finance the property and accrued interest (I) upon the sale of the property.
According to CPF, “if the selling price (including the option monies) after paying the outstanding housing loan is not enough to fully refund your P+I, you do not need to top up the shortfall in cash, provided the property is sold at market value.” This applies to both resale HDBs and private property.
In a hypothetical situation, if you and the buyer have agreed on a selling price of $400,000 for the property. However, the valuation for the property is $450,000. You had previously purchased the property for $420,000 and you have been using CPF to pay the mortgage fully ($380,000 principal and $70,000 interest). This means that the selling price is below the valuation and the purchase price. On top of making a loss on the sale, you would have to top-up the shortfall in the CPF refund of principal and accrued interest in cash ($50,000).
For sellers of private property, obtaining a valuation prior to selling your property may be worth the cost of doing so to avoid the nasty situation of having to top-up your CPF in cash.
However, sellers of resale HDB face a more uncertain situation as only buyers can request the HDB valuation.
Both Buyers and Sellers Should Be Aware of The Valuation To Avoid Unpleasant Situations
Whether you are a buyer or a seller of property, you should do your research and perhaps insist on a valuation before proceeding with a sale of the property.
For HDB buyers and sellers, finding out the indicative valuations through HDB’s Resale Flat Prices e-service is better than having a shock when you realise you need to pay COV or need to top-up CPF.
This article was published on September 28, 2020 and has been updated with new information.
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