Are you looking to sell your HDB flat in the resale market? You may be preparing to welcome a new member to your family, or may have finally saved enough to upgrade to that dream home you always wanted.

On the other hand, you may have spotted your ideal flat in the resale market, and am excited to make an offer for the flat.  Before you jump the gun however, there are some features of the Singapore’s resale market we must first consider.

One key feature affecting transactions in the resale market is Cash Over Valuation (COV). In this article, we look at what COV is, and how it would affect your profits or how much you have to pay as a seller or buyer in the resale market.

In Singapore, we have a unique housing environment, where a large majority of us own a HDB flat. Besides buying from the government in the primary market, Singapore also has a secondary resale market as well. In the resale market, buyers and sellers are free to negotiate with one another and decide on the purchase price.

COV is the extra money that buyers have to pay in addition to the market value of the property during resale transactions. When we as buyers decide to pay more for the flat then the market value, we would then need to fork out extra money to pay for COV.

You will probably be wondering, how is market value decided? For HDB flats, the market value will be arrived at by an a HDB panel of independent valuers to ensure fairness.

Here’s a simple scenario

Suppose you are selling your HDB flat, and want to get $450,000 for it. A HDB valuer looks at the flat, and declares that your flat value’s is only worth $425,000, max. However, you still want $450,000 for the flat; and haggle with the buyer over the premium above the $425,000.

This $25,000 premium or difference will then be the COV.

COVs are paid with hard cash when you are buying the flat. This is because banks or HDB decides the loan amount based on the market valuation instead of the seller’s asking price.

COVs become an issue since sellers often haggle with buyers, or demand the extra money or cash premium above the market valuation of the flat for profit. This makes flats less affordable for buyers.

Depending on market conditions, as well as the location and condition of the resale flat, COVs paid can vary greatly. The location of the flat affects the amenities and facilities accessible to residents. For instance, a buyer who wants to improve their child’s chances of getting into a “branded” school will probably be willing to pay above the market valuation price.

Another factor is the condition of the flat. If your flat looks like it has braved a tornado, the buyer will probably be offering a lower price. They will have to pay for renovation fees after all.

Naturally, many Singaporean home buyers became unhappy and frustrated over this, especially during rising markets. In 2011, median COV prices hit $38,000. More sought-after estates like Bishan even fetched astounding COVs of up to $100,000.  A Bishan maisonette actually managed to command a COV of $250,000 and be sold at $1.05million in end 2013.

However, COV has largely been removed from the negotiation process due to changes introduced by the government since March 2014. If you are either buying or selling a flat, both parties will have to first decide on a price before getting an official valuation. That is, an official valuation will only be sent by HDB after the buyer has received an option to purchase (OTP).

How this helps is that it prevents haggling of COV between the buyer and sellers.

Back to the scenario

Before the changes: Before agreeing on the sales prices, both buyers and sellers would wait for a flat’s valuation. After the market valuation is received, for example $425,000, the parties would then negotiate to pay COV on top of this.

Previously, negotiations between buyers and sellers tend to focus on COV or the cash premium. In booming markets, the COV can be jacked up by the seller (beyond the $25,000 mentioned earlier)

After the changes: Say you found a buyer for your flat at $445,000. At this point, the COV is still unknown. Valuation by HDB is only received after the OTP has been signed, and it is revealed that the market valuation is only $425,000.

At this point, you cannot change your mind, and decide to charge a COV of $25,000 to the seller. The buyer will instead stick to the OTP, and pay you $445,000 – $425,000 = $20,000 in COV.

With this, negotiations between buyers and sellers on COV are removed from the sales process. Sellers thus cannot use COV as a benchmark, and hike up their asking prices above it. Negotiations will instead rightly be based on recent transacted prices as a benchmark.

HDB has also stopped publishing quarterly-median COV prices online. In addition, past records of COV prices have also been removed. HDB instead publishes daily prices of resale transactions and buyers make offers based on the updated figures.

This new rule also prevents buyers and sellers from over-declaring a selling price just to get an extra loan amount. Buyers will not do this, simply because they would have to pay for the huge difference between proclaimed selling price and the market valuation.

The introduction of these changes has helped to stabilise Singapore’s property market. Citing a press release by PropNex, around 80% of resale flat transactions in 2016 had no Cash Over Valuations. The effect is further compounded by the cooling of property prices due to cooling measures, which makes resale units financially attractive.

Finally, besides taking into account COVs in your budget, having a suitable loan to finance your purchase is important as well to reduce your costs and take you all the closer to owning that dream home.

It would be wise to contact us, where our friendly and experienced mortgage advisors will assist and guide you with your financing needs.

The Redbrick Team
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