Are Option Reissues the Reason for The Rebound in The Property Market?

URA Steps Up Tracking Of Repeated Issue of OTPs. Source: Business Times.

There was an article in the Business Times today with regards to the practice of reissuing options by housing developers. Some people from the public have expressed concerns regarding this practice. Why? First, the data submitted to URA may be an inflationary number that does not correspond to real market demand—giving the impression that the market is picking up while it is not.

Second, these buyers may not have the means to go ahead and purchase a property in the first place. As such, it is wrong to use the reissue option as a sales tactic to get them committed. Because ultimately, these buyers will lapse the option and not commit to the purchase.

So, is there a real correlation between this rebound and the practice of reissuing options? Let us find out.

The Reason for Having A Longer Option Period

The concept of reissuing option does sound a bit strange right? If you were to purchase a private property in the resale market, there is no such thing as an option reissue. Instead, the option period is a time frame that is agreeable with both the buyer and the seller. Although the standard is 14 days, it is possible to have a much longer time frame.

For example, if you are an HDB upgrader looking for a private condo. You just started looking and have not decided on what you want. You finally found the dream home you are looking for; however, you are still holding on to the HDB. Assuming if you are a Singaporean and your HDB is fully paid, making that purchase will require a 25% deposit, 4% buyer’s stamp duty and a 12% Additional Buyer’s Stamp Duty. For a condo that is $1mil, you will need to come up with 41% of the purchase price. This total amount works out to be $394,600, which is quite a significant amount. Of course, you are still eligible to claim the 12% ABSD refund from IRAS within six months after selling your HDB.

There Is More Than One Way To Skin A Cat. An Idiom By Mark Twain. Why On Earth Were They Skinning Cats In The First Place?

There Is More Than One Way To Skin A Cat

Alternatively, you can do the following by requesting the private condo seller to give you an extended option period of 90 to 120 days. After securing the option, you now have more time to sell off your HDB. All you need to do is to ensure that HDB approves the sale of your unit and you are now ready to exercise the option for your private condo. If you can stagger the completion carefully, you will be able to make use of the funds from the HDB to cover part of the initial deposit as well. All you need is just 5% cash, 4% buyer’s stamp duty. The total comes up to be around $74,600, which is a fraction compared to the earlier scenario.

In both circumstances, you would have done your due diligence by understanding the cash proceeds from the sale of your unit as well as the loan amount you can borrow from the bank. Due to the prevalence of information, consumers of today are more educated. Almost everyone I talk to have a clear idea of the fees involved, guidelines and even regulations.

Why Does the Developer Reissue Option Then?

If you can vary the option date for private properties, then why does the developer need to reissue options then? Well, if you are a housing developer in Singapore, you must abide by the housing developer rules set out in the Housing Developers (Control and Licensing) Act. In this act, all developers will need to follow the option to purchase and sales and purchase agreement as prescribed in the housing developer rules. In addition to following the terms of sale, you will also need to maintain a project account. Now, there is a reason for doing this. The whole idea of these regulations is to minimize the risk to a consumer when they purchase a building under construction in Singapore. I am sure you have heard of horror stories in other parts of the world where the developer went bankrupt halfway, leaving an empty shell of a building. Or the entire project may be a scam from the very beginning.

The Rationale of Having This Act

Historically, this act has demonstrated its effectiveness. If you remember, there was a specific joint venture involving Lehman Brothers that went to completion despite their collapse. Of course, despite these safeguards, there is still the unfortunate case of Astoria Development. The bankruptcy of the developer left uncompleted homes in Sycamore and Laurel Tree. URA is currently investigating its project account for any misuse or regulatory breaches.

What Is Inside the Housing Developer’s Rules?

There are a few things stated in the housing developer’s rules. First, the vendor (developer in this case) will have to send the sales and purchase agreement(S&P) to the purchaser or purchaser’s lawyer within 14 days of granting the option to purchase (OTP). Second, the OTP will expire within 21 days of receipt of the S&P.

In other words, if you ask the developer to send the S&P on the very last day, you would have around two weeks + three weeks to exercise the OTP. To give some purchasers more time, of course, what some developers do is to reissue another option once the initial one expires. Every time you reissue an option, you get another five weeks extra to exercise your option to purchase.

A Snapshot Of The Housing Developer Rules. Source: Singapore Statutes Online.

Does This Reissue Option Inflate Market Data and Cause Confusion?

Of course, developers do not do this for fun to inflate the sales figure. The main intention is to help some of these purchasers in sorting out their time frame. Let us assume if you are a buyer who is keen to purchase a unit type only to find it was “sold out”. There is another development next door that offers the exact layout with almost the same price. What would you do?

By masking the sale, the developer would have lost the opportunity to clear their stock. Which is counter-intuitive in the first place, right?

There Is A Better Way to Understand the Real Estate Market

There are a few ways to understand the real estate market. If you are only looking at the numbers for new launches, I am afraid that is a terrible way to determine the direction of where the market is heading. You must look at the volume of both the resale and new launches to understand the situation better. Only by studying this underlying demand would you better understand where the market is heading. The current data tells you that the total number of resale non-landed private residential properties in July 2020 was at 847 units. This number is currently at an all-year high. In other words, the data for the new launches do correspond to current market conditions. It is not a stand-alone figure “manipulated” by the developers.

Resale And New Launch Volume In 2020. Source: Square Foot Research

The complexity of The Real Estate Market in Singapore

The real estate market in Singapore is not as simple as it was before. You cannot be closing two eyes, purchase a property and expect the prices to go up. Nor can you predict future trends because the property cycle by Homer Hoyt is subjected to Singapore’s government measures. And lastly, you cannot assume that the sales figures are inflated simply because the developer is reissuing options. To help you understand the market better, why not speak with a real estate professional today? Get all your answers from someone who is on the ground every day looking at properties, analyzing statistics and making sense of all the numbers. Meanwhile, stay safe, do your research, and always look for proof in an assumption!

Article contributed by Jerry Wong.

Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos and has been in real estate for ten years. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Book a video call appointment and Jerry will share with you the following.

  1. How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
  2. Why timing is not the most important thing. Because some people can buy the same condo at the same time, but one end up making $100k to $200k while the other suffers losses of the same amount!
  3. Understanding your requirements and craft a solution for your real estate needs. Be it in the form of asset progression, tax planning, financial calculations, rentals, sales, etc.

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