In Singapore, about 80% of our population lives in HDB flats. For some, upgrading from an HDB flat to a private property is a goal that they strive towards.
If you had a relatively smooth experience with buying your first HDB flat in the past, and assumed that the process of upgrading from an HDB flat would be just as simple, you will be surprised. In reality, upgrading from an HDB flat to a private property is much harder than buying your first flat.
Upgrading From An HDB Flat To A Private Property Is Much Harder Than Buying Your First HDB Flat
When you buy your first HDB flat, your main concern is fulfilling the minimum down payment required, and ensuring that you can qualify for an HDB/bank loan. If you are taking an HDB loan, the minimum down payment required is 10%. If you are taking a bank loan, the minimum down payment required is 25%, of which 5% needs to be paid by cash. This is why many HDB buyers may still prefer to take an HDB loan over a bank loan, even though interest rates for HDB loans are currently higher at 2.6% p.a.
When upgrading from an HDB flat to a private property, the steps become much more complex. This means that the possibility of something going wrong increases if you are not careful enough. In this instance, we assume that you need to sell your existing HDB flat in order to upgrade to a private property.
Selling Your HDB Flat Before Buying A Private Property
Generally speaking, when it comes to upgrading from an HDB flat to private property, it’s always advisable to sell your existing HDB flat first, before purchasing a private property. This is because by selling first, you will know exactly how much you will receive, what you can afford, and more importantly, what you can’t afford. Furthermore, you have to sell your existing property HDB flat within 6 months to avoid incurring the 12% Additional Buyer Stamp Duty (ABSD). The last thing you want is to be caught in a tricky situation where you need to sell your HDB flat in a rush to get your ABSD remission, and ended up accepting a lower than ideal offer.
Even if you intend to sell your HDB flat within 6 months of buying your private property, you will still need to pay the 12% ABSD in cash first. For example, if you are buying a private property for $1 million, this means that you will need to pay a 12% ABSD, which amounts to $120,000 if you have not sold your HDB flat upon exercising the option to purchase the private property.
Step 1: Selling Your HDB Flat
If you want to sell your HDB flat, you may wish to engage a real estate agent, or multiple agents, to market the flat on your behalf. Do take note of the items you need to discuss with your agent, including commission fees and exclusivity of the arrangement. You can check out our list of 5 things to discuss with your property agents before engaging them.
Your agent should advise you – but just in case if they don’t – remember that you must register your intent to sell your HDB flat with HDB first. You can only grant an Option-To-Purchase (OTP) to buyers at least 7 days after registering your intent to sell.
Depending on the demand for flats in your area and your asking price, the process of finding a buyer who makes you a suitable offer can take days, weeks or up to several months.
Step 2: Issuing An Option-To-Purchase (OTP), Receiving The Option Fee & Exercise Fee
Once you receive a suitable offer, you can accept it. To grant the OTP for an HDB flat, the potential buyer needs to pay an option fee of between $1 to $1,000. This is unlike buying a private property when the option fee is usually at least 1% of the mutually agreed price.
In other words, as an HDB seller, don’t count your chickens before they hatch. While $1,000 is still money, it’s not a huge sum and it’s possible that your potential buyer may still pull out of the transaction and forfeit the option fee.
Some common scenarios that may lead to them pulling out may include:
Receiving a poor valuation report. If they agree to purchase your flat for $500,000 but the HDB valuation report is only $450,000, this means that the cash over valuation (COV) will be $50,000, which needs to be paid by cash. Since HDB will only do the valuation after the OTP is issued, this posed some uncertainty for both the buyers and sellers.
Better offers elsewhere. While you may have issued an OTP for the buyer, it doesn’t restrict them from searching for other flats that may be more suitable. For example, an already-committed buyer may suddenly find a similarly-priced HBD flat available at the same block/level as his parents. In this instance, even if they have paid you $1,000 for the OTP, they may choose the other flat and not exercise their OTP. Alternatively, they may find a cheaper flat, even after accounting for the option fee that they have paid.
During this period, you cannot issue an OTP to another buyer. If your buyer does not exercise his OTP within 21 working days, the option lapses, and you are allowed to grant your OTP to other buyers.
To exercise the OTP, the buyer will need to pay a deposit to you. This is an amount that should not exceed $5,000.
Step 3: Once The Buyer Exercise The OTP, You Can Start Looking For Your Private Property
Once your buyer has exercised the OTP for your HDB flat, this gives you the leeway to start looking for your private property.
At this point in time, you would already know the selling price of your HDB flat and how much cash proceed you will get from the sales. You will also have a gauge on when you are expected to hand over your keys to the new owners. This basically acts as the timeline to finding your new place.
Most importantly, according to IRAS, once an agreement to sell your HDB has been issued and executed to buy the property, it’s no longer considered as a residential property that you own. Essentially, this means that if you buy a private property after the OTP for your HDB has been exercised by the buyer, you would not be liable for ABSD.
Depending on how urgent you need to move into your new home, you may need to speed up the process of purchasing your private property. A piece of advice here would be to shortlist a few potential places that you can afford in advance before you sell your HDB flat. This allows you to immediately start looking and negotiating for your private property purchase once your buyer has exercised the option to purchase your HDB flat,
Alternatively, if you have interim housing solutions for your family, you will have more time to search for your next property purchase.
Step 4: Calculate Carefully Your Cash Flow Timeline From Selling The HDB Flat
Being able to afford to upgrade from an HDB flat to a private property is one thing. Managing the cash flow situation that is required to complete the transaction smoothly is another. Here’s a scenario to explain.
Let’s assume you have sold your HDB flat for $500,000. With an existing loan of $200,000, your proceeds will be $300,000. Of this, $150,000 needs to be refunded to your CPF Ordinary Account (OA). We also assume that the private property purchase would be $1 million.
For simplicity, let’s assume that the option for your HDB flat was exercised on 1 January. After the option had been exercised, both buyers and sellers must submit a resale application for HDB to approve. We assume that this was done in 2 weeks’ time, on 15 January.
Upon receiving the resale application, HDB will post the application results – if all documents are in order – within 14 working days (about three weeks),. This will bring us to the first week of February.
Upon HDB’s acceptance, it will take about 8 weeks from the date of acceptance to process the sales application. Based on the timeline, this brings us to the first week of April. You will receive your cash proceeds during that period, but it will take about a week before the refund is made to your CPF. This means that you will only have the full disposable cash and CPF amount of $300,000 to utilise for your private property purchase sometime in mid-April.
Step 5: Cashflow Timeline For Buying A Private Property
The cash flow timeline from purchasing a private property is crucial. Since the HDB flat has been sold for $500,000 with an outstanding loan of $200,000, you will get a sales balance of $300,000. On paper, with $300,000 in cash and CPF to deploy, you would be able to meet the minimum down payment requirement of $250,000 (25% of $1 million).
However, that is not the only thing to be concerned about. Cash flow timeline management is also vital.
To make an offer for a private property, you usually have to pay an option fee of 1%. This means that you need $10,000 in cash to secure the OTP. By default, you need to pay the remaining 4% to exercise your option within two weeks though you can negotiate the option period with the seller.
Thus, to exercise the option, you need a total of $50,000 in cash. This means that you either need to have the cash on hand to secure and exercise the OTP, or wait till early April when you receive the cash proceeds from the completed sale of the HDB flat. You will also need to pay the buyer stamp duty in cash, which is about $24,600 for a $1 million property. All in all, the total cash outlay to secure the OTP, exercise the option and pay the buyer stamp duty is $74,600, for a $1 million private property.
Assuming you have enough cash, you have the means to start searching, secure the OTP and exercise the option for your private property before early April. If you do not have enough cash, you will need to wait until the full amount from the sale of your HDB flat is credited to you.
Typically, upon exercising your option for a private property purchase, it will take about 12 weeks for the date of completion for the property. Say, if your HDB option was exercised on 1 January, and you exercised the option to purchase your private property on 19 January, then the date of completion would be around 19 April. This gives you just enough time to ensure that you have received the proceeds from the sale of your HDB, to pay for the down payment required for your private property.
The table below shows the timeline beginning from the sale of your HDB flat to the purchase of your private property.
|Buyer exercise option for your HDB flat||1 January||You get $5,000. You can now purchase a private property without having to pay ABSD.|
|You secure your OTP for private property||5 January||You pay $10,000 (1% of $1,000,000).|
|You exercise your OTP for private property||By 19 January or earlier, assuming a 14-day option period.||You pay additional $40,000 (4% of $1,000,000)|
|Within 14 days of exercising your option, you must pay the buyer stamp duty to IRAS. If there are an ABSD payable, this will also need to be paid.||By 2 February or earlier||You pay $24,600 in Buyer Stamp Duty for a $1 million private property|
|Receive proceeds from the completed sale of the HDB flat. Cash will be received first. CPF refund will come about 1 week later.||Mid-April||You receive $300,000 in cash and CPF from the sale of your HDB flat|
|At about 12 weeks from the date you exercise your OTP, the sale of completion for your private property will be done.||Around 19 April||Remaining down payment of at least $200,000 (20% of $1,000,000) is required to complete the transaction. Remaining amount to be financed through a bank loan|
As you can see from the table above, the timeline is relatively tight when it comes to when you would receive the full amount from the sale of your HDB flat, and when you need to pay the down payment to complete the purchase of your private property. If you don’t have enough funds, you will need to delay the completion of your private property purchase.
During this period, you will need to secure the bank loan required to finance your private property purchase and engage a law firm to assist you with the paperwork required to complete your property transaction. Legal fees would typically cost you between $2,500 to $3,000. You will also need to pay the commission to your agent, which will typically be deducted from the proceeds that you get from the sale of your HDB flat.
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