Understanding The “Option To Purchase” Agreement Before Exercising It
Although buying a home in Singapore is an exciting experience, homebuyers should ensure they pay special attention to the most important aspects of it: conveyancing process, stamp duties, property taxes, and maintenance costs for condominiums.
Whether you’re in a hot property market or looking at your options, leveraging the Option to Purchase is a great way for investors and homebuyers to tie up a property before purchasing it.
In this post, we’ll discuss how both lessees and investors can use an Option to Purchase to bide time before buying a piece of property.
What Is An Option to Purchase Agreement?
An Option to Purchase (OTP, in short) is a legally-binding agreement that enables a potential homebuyer to hold onto a property until the full payment is made. This agreement with the seller legalizes the buyer intent to buy the flat for a given period of time and for a particular sale price.
As such, the owners cannot do business with any other interested parties during the option period. Generally, the owner gives the buyer the Option to Purchase the property depending on the terms and conditions contained in the Option to Purchase agreement in exchange for an amount of money known as the option fee.
The Option Fee is usually 1 percent of the sale price of the flat, but can still be negotiated between the parties involved. The Option Period is typically 14 days, but can also be negotiated between the parties involved.
As we’ve mentioned, the Option to Purchase allows the potential buyer to bide time or reserve the flat. This is because for the stipulated period of time contained in the Option to Purchase, that particular property buyer is the only one who has the right to buy the flat and not anybody else.
Therefore, the Option to Purchase is extremely important because the owners cannot sell the home to any other period during the stated Option period. The buyer also has the same duration to decide whether to proceed with the transactions.
A draft agreement is typically prepared by the property owner’s lawyers and presented to the buyer’s lawyers who will then study the terms of the agreement and may ask to amend or renegotiate the terms.
For that reason, preparing an OTP sometimes requires multiple drafts, negotiation, and contributions from the lawyers from both sides. Once the terms and conditions have been agreed upon, the seller will then sign the OTP and the buyer would be required to pay the requisite Option fee. Both the seller and the buyer are then given a copy of the OTP.
When To Exercise Option To Purchase?
You should exercise the Option to Purchase if you want to go on with the transactions within the agreed option period and at your lawyer’s law firm. When exercising the Option to Purchase, you are required to append your signature in the ‘acceptance’ section of the agreement.
When it comes to the home buying process, this is basically how the Option to Purchase works:
- The owners start by listing prospective buyers will then check out the listed property and negotiate the terms and the price.
- Once the buyer and seller have reached an agreement regarding the price and the terms, the seller’s lawyer will prepare an Option to Purchase and submit it to the interested buyer for review.
- Once both the seller and buyer have agreed on the terms and conditions, the buyer will need to pay the Option fee, so the seller can sign the OTP.
- When signed, the OTP becomes a legally-binding contract and no one can make any amendments. An acceptance copy of the OTP is then sent to the prospective buyer. At this stage, it’s recommended to obtain an Approval in Principle (AIP) from a financial institution.
- Once you have been approved for a bank loan, the lender will send a value to assess the property that you’re interested in. This is actually part of exercising the Option to Purchase at your preferred lawyer’s office. You’ll need to pay the Option Exercise Fee by cheque, to the seller’s lawyer. The Option Exercise Fee (4 percent) and the Option Fee (1 percent) make up the deposit (5 percent).
What Happens When Buyer Chooses To Exercise The Option To Purchase?
The procedure is quite different for private properties and HDB resale flats. Let’s take a brief look at each property type, starting with the Option to Purchase HDB resale flats.
For HDB Resale Flats
You must sign on the acceptance section and ask a witness to sign the HDB OTP for you. The witness should either be a property agent or a Singapore citizen/permanent resident who is aged at least 21 years old and is not part of the resale transaction.
When exercising the OTP HDB option, you will have to pay a downpayment, which is typically negotiable. Bear in mind that along with the required HDB Option Fee, this initial sum should not be more than $5,000.
At this stage, both parties will have to send the resale application to the HDB within the period of time specified in the HDB Option to Purchase.
Keep in mind that both the owners and the buyers will have to submit their own application form to HDB within seven days. The resale application will only be complete once both sides have submitted their application to HDB.
For Private Property
As with HDB resale flats in Singapore, the buyer will have to sign the acceptance section of the Option To Purchase and pay the required deposit fee. The main difference is that the deposit fee is typically 5-10 percent of the purchase price, with the Option fee excluded.
Generally speaking, for both private condos and resale flats, the sellers and buyers will have to agree on the date of completing the transaction. Generally, this is approximately 10 to 12 weeks upon the signing of the OTP.
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What’s Included In An Option To Purchase Agreement?
As we’ve mentioned earlier, if you’re purchasing an HDB resale unit, you need to exercise OTP contract from HDB. If you’re buying private property, property agents or the seller’s lawyer may create the document.
The Option to Purchase contract should generally include the following major aspects:
- The Option Fee (1 percent of the buying price for private property and not exceeding $1,000 for HDB resale flat). However, Option Fee HDB can be negotiated with the seller.
- The Option Period (usually 14 days) can also be negotiated. For HDB resale flats, this period should be 21 days, including weekends and public holidays.
- The property details, including the address, floor area, and purchase price.
- Details of the seller and buyer, including their full names, addresses, contact numbers, Identification numbers, etc.
- Whether the flat is vacant or furnished – if the flat is being sold with its furniture and furnishings, the Option to Purchase should also include an inventory list as well as the buyer and seller obligations.
If you are not sure of any of the terms used in the Option to Purchase, make sure to seek clarification from the seller. For successful completion of the home buying process, you should do your due diligence and seek legal advice if need be.
What Happens If The Option To Purchase Is Not Exercised Within The Option Period?
If the buyer doesn’t exercise the OTP before the option expiry date, the OTP expires and the buyer will forfeit the fee to the seller unless the OTP states otherwise. The seller is free to retain the fee and can list the property again.
What Happens If Either Party Chooses To Back Out From The Deal?
Either the buyers or the sellers can back out from the deal after the Option to Purchase has been exercised, but with charges. If the buyer backs out from the deal after signing the OTPs, he/she will forfeit the fee to the seller. If the seller and co-owners decide to back out after signing the OTP, he/she must refund the fee to the buyer.
In addition, the buyer might have a claim for specific performance of the OTP (i.e. force the seller to proceed with the transaction). This means either party cannot back out from the deal without a valid reason. The court will typically hear submissions from both parties and decide whether they can back out from the contract.
Drafting and entering into a Purchase Option agreement for the purchase of private property in Singapore can be a tricky process since it can involve multiple drafts of the OTP and protracted negotiations between the two sides.
Moreover, the seller cannot change the terms and conditions of the OTP option once they have signed it and the Option fee has been paid.
Therefore, it is a good idea to carry out your due diligence and seek legal advice before entering and exercising an Option to Purchase so you can safeguard your rights as a seller or buyer.
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