In this era of online shopping, banking and well, pretty much everything, many of us are familiar with the acronym ‘OTP’. But aside from meaning ‘one-time password’, did you know that OTP is also short for ‘Option to Purchase’?
In the property world, an Option to Purchase (OTP) is a legal agreement between the buyer and seller (or developer) for the sale of a residential property. When you sign the OTP agreement, you’ll need to pay an option fee to ‘reserve’ the property. If you ‘back out’ of the purchase (i.e. you do not exercise the option by the expiry date), you forfeit the amount paid.
Update: Effective 30 September 2022, the medium-term interest rate floor used to calculate the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) for residential and non-residential property will be increased by 0.5%. This will apply to loans where the OTP is granted on or after 30 September 2022. However, should there not be any OTP, the new changes will apply to any Sale and Purchase Agreements (SPA) that take place on or after 30 September 2022.
Here’s a guide to what is the OTP and its implications.
Private Property and HDB OTPs
- An OTP is a legal agreement between the buyer and the seller to buy a residential property
- The buyer pays an option fee and is granted the rights to buy the property for the option period (three weeks)
- If the buyer does not purchase, the seller has the right to forfeit the option fees
| OTP for private property | OTP for HDB resale flat |
| OTP agreement drafted by seller’s lawyer | To use HDB’s OTP form |
| OTP agreement signed by buyer and seller after agreeing on the price | OTP agreement granted by seller at least 7 days after registering Intent to Sell on HDB Resale Portal, signed by buyer |
| Option Fee usually 1% of purchase price (negotiable), paid by buyer | Option Fee not exceeding $1,000, paid by buyer |
| Option Period typically 14 days (negotiable up to 2 months) | Option Period is 21 calendar days |
What’s an OTP Agreement?
An OTP agreement is a legal contract signed between a buyer and a seller of a residential property and basically gives the buyer the exclusive rights to purchase a property from the seller in the future.
After you and the seller have agreed on the terms and purchase price of the property, the seller will grant you the OTP document. To ‘reserve’ the property from the seller, you’ll need to first pay a small booking deposit, which is known as the Option Fee.
In exchange, the seller won’t look for potential buyers and cannot sell the property to another party during the agreed period of time stated on the OTP. This Option Period gives some time for both you and the seller to consider going ahead with the deal.
In order to make the OTP agreement as complete as possible, the seller can hire a property lawyer to draft the document before sending it to you.
On receiving the OTP, you can engage a lawyer to review, negotiate, and request to amend any of the terms before signing.
If you’re buying an HDB resale flat, you and the seller must use the OTP document prescribed by the HDB.
Note: Bear in mind that as a buyer, you’re not obliged to buy the property from the seller after signing an Option to Purchase agreement. Rather, you can still consider whether or not you want to purchase the property while exploring other options.
What’s Within an OTP Agreement?
As mentioned previously, if you’re buying an HDB resale flat, you’ll have to use the OTP agreement from HDB. For private property, the seller’s lawyer or property agent may prepare the document.
The OTP agreement should typically cover these basic elements:
1. Option Fee
To be negotiated with your seller, the option fee is usually 1% of the purchase price for private properties, or not more than $1,000 for an HDB resale flat.
2. Option Period
Typically 14 days. However, this period is negotiable and can be extended to two months. For HDB resale flats, this will be 21 calendar days including Saturday, Sunday, and public holidays.
3. Details of the Property Being Sold
Including the following:
- Purchase price
- Floor area
- Address
4. Details of Both Buyer and Seller
Including the following:
- Full names
- IC numbers
- Contact numbers
- Addresses
5. What Happens if the OTP Is Not Exercised Before It Expires
It should state whether or not the Option Fee will be forfeited.
6. Whether the Property Is Furnished or Vacant
If the property is being sold together with its furnishings, the OTP should include an inventory list.
7. Obligations of the Buyer and Seller
If you’re unsure of any of the terms stated in the OTP, be sure to clarify with your seller. You can also seek legal advice if needed.
For more on the legal procedure of buying and selling property, see our guide to property conveyancing.
What Is the Process for Private Property OTP Agreement?
This is usually how the signing of the OTP fits into the property buying process:
- The seller lists the property on a property listing website.
- An interested buyer will view the property and negotiate the price and terms.
- After the buyer and seller have come to an agreement, the seller will hire a lawyer to draft an OTP document (in the case of private property) and send it to the buyer for review.
- Once both parties are agreeable to the terms, the buyer will pay the Option Fee to the seller, and the seller will sign the document.
- Once signed, the OTP becomes a legally binding document. An acceptance copy will also be sent to the buyer.
What Is the Process for an HDB OTP Agreement?
The above procedure outlines the basic steps involved in signing the OTP for a private property.
For HDB resale transactions, however, there are prescribed formats and rules for the HDB OTP. Some pre-requisites before you can kick start the HDB OTP process are:
- The seller needs to have registered his Intent to Sell for at least seven days
- The buyer needs to have registered her Intent to Buy
- The buyer needs to have her home loan documents ready
If you’re buying an HDB resale flat, both you and the seller must register your Intent to Buy and Intent to Sell on the HDB Flat Portal respectively.
In addition, the seller can only grant the HDB OTP to you at least seven days after he’s registered his Intent to Sell. There is no need to get a lawyer to issue an HDB OTP as you are to use the HDB OTP document furnished by HDB instead.
If you wish to take an HDB Concessionary Loan, you’ll need to obtain an HDB Flat Eligibility (HFE) letter.
If you’re taking a housing loan from the bank, you’ll need to get a Letter of Offer or In-Principle Approval (IPA) from a bank before reaching the HDB OTP stage. You’ll need this letter when you exercise the OTP.
What Happens When the Buyer Chooses to Exercise the OTP?
The procedure is a little different for HDB resale flats and private property.
Exercising an HDB OTP
You’ll first need to sign on the ‘Acceptance’ section and have a witness sign the HDB OTP. The witness can either be:
- A property agent
- A Singapore Citizen or Permanent Resident who’s at least 21 years old, and is not involved in the resale transaction
When you exercise the HDB OTP, you’ll also need to pay the seller a deposit, which you can negotiate with him or her. Do keep in mind that together with the Option Fee, this deposit cannot be more than $5,000.
After that, both you and the seller will need to submit the resale application to HDB within the agreed number of days reflected in the HDB OTP.
Do take note that both you and the seller will need to submit your respective portion of the application to HDB within seven days of each other. The resale application is only complete when HDB has received the application from both sides.
Exercising a Private Property OTP
As with the case for HDB resale flats, you’ll need to sign the acceptance copy of the OTP and pay the deposit fee. What’s different is that the deposit fee is usually five to 10% of the purchase price, minus the Option Fee.
In general, for both resale and private properties, you and the seller will agree on a date of completion for the sale. Typically, this is around 10 to 12 weeks from the signing of the OTP.
What Happens After the Buyer Exercises the OTP?
As a buyer, you’ll also need to pay the Buyer’s Stamp Duty (BSD) within 14 days of exercising the OTP. In addition, you may also need to pay Additional Buyer’s Stamp Duty (ABSD), depending on your citizenship status and how many residential properties you’ve bought.
Important Note for Private Property OTPs: Re-Issuing is No Longer Allowed
Although sellers have the right to forfeit the option fee and put the property back up for sale when buyers do not exercise their option by the OTP expiry, there was reportedly been a growing trend of developers not enforcing this rule.
To incentivise buyers, some developers agreed to let buyers ‘cancel’ for free or re-issue the OTP, essentially extending the buying window for buyers. This was beneficial to those who wanted to ‘lock in’ early bird discounts but needed more time to decide and/or rustle up the cash for the purchase.
Previously, this was allowed and sellers could extend the OTP for up to 18 months. However, with effect from 28 September 2020, housing developers will no longer be allowed to exploit this loophole. The restrictions announced will:
- Stop developers from providing upfront agreement to purchaser(s) to re-issue OTPs
- Stop developers from re-issuing OTP to the same purchaser(s) for the same unit within 12 months after the expiry of the earlier OTP
- Require developers to inform purchaser(s) of these conditions upfront
This means that if you want to buy the property, you must exercise your option within three weeks (the OTP period). If you decide not the purchase and change your mind thereafter, the developer cannot re-issue (i.e. extend) your OTP, and you must wait for 12 months.
If you really need more time, you can, however, formally apply for an extension by emailing URA. You can extend the window by up to 12 weeks from the OTP date, provided both you and the developer are agreeable. Do note it’s also illegal to backdate an OTP.
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