My Income Situation Changed After Signing The Option To Purchase. How Now?
It’s got a floor to ceiling picture window, a pool perfect for re-enacting half the Pirates of the Caribbean scenes, and a walk-in wardrobe that was the size of your flat growing up.
It was your dream home, and you didn’t mind putting down the Option To Purchase (OTP) – even with the big NON-REFUNDABLE clause.
Then Covid-19, or a market downturn, or something else caused your income situation to change; and now you’re saddled with a property you can’t afford. What do you do next? Here are some urgent measures:
Reader questions like the one above rarely have a clear-cut answer. The “right” move depends on your finances, timeline, long-term goals, and how much downside you’re prepared to accept if things don’t go to plan.
That’s the hardest part of any property decision, not finding information, but understanding what it means for your situation before committing.
Over time, that’s also why we decided to work with agents who shared the same data-driven and advisory-led approach behind our editorial, consultants who could help readers think through decisions more objectively, rather than simply push transactions.
Today, the team has worked with more than 2,000 clients across over $5B in property transactions.
A quick explanation of the Option to Purchase
The Option to Purchase is the first step to purchasing a property. It usually entails a one per cent deposit of the property price, which cannot be refunded.
After the OTP is signed, you have a time limit – often 14 days – in which to exercise the OTP. During this time, the seller cannot legally sell the property to anyone else.
You must exercise the Option to Purchase within the time limit, which leads to paying the remaining balance. In most cases, the OTP is one per cent of the purchase price, and the balance is another four per cent to complete; this constitutes the minimum five per cent cash down on a property*.
Failure to do this on time will cause the OTP to lapse, and you’ll lose your deposit.
*Minimum cash down for bank loans is five per cent. The next 20 per cent can be in a combination of cash or CPF, together making up the minimum 25 per cent down payment.
Before look at solutions, have you only signed the OTP, or have you also exercised the OTP?
If you’ve only signed the OTP without exercising it, the consequences are less devastating. You can still back out of the sale, at worst forfeiting your one per cent deposit.
If you’ve already exercised the OTP (e.g. you’ve paid the initial five per cent down), this is a more problematic scenario. You can be sued by the sellers for failing to complete the transaction.
These cases are beyond our remit, and you need to confer with your conveyancing lawyer or other legal professionals; it typically entails negotiating with the sellers to rescind the transaction, and covering any costs they incurred (e.g. if the sellers had to back out of their own property purchase, because of your failure to complete the deal).
Assuming it’s the former however, here are some possible alternatives to flat out losing your OTP:
- Ask for an extension of the OTP
- Look for clauses that could provide for your situation
- If it’s a loan approval issue, approach non-banking FIs
- Rope in another co-borrower
- Appeal to the seller
1. Ask for an extension of the OTP
If you just need more time to secure a loan, you can ask to extend the OTP instead of losing your deposit. There may be administrative costs to doing so, but it’s much cheaper than losing your deposit.
Many sellers won’t object to this, as they’d rather wait a bit longer than go through the hassle of finding another buyer.
If you’re buying from developers, this isn’t uncommon at all. Some developers even position this as a “reservation scheme”. It just means that if you put down the deposit, they’ll agree to immediately renew the OTP when it lapses, rather than sell it to someone else. This allows you to “chope” the unit, if there’s high demand.
(It can cost around $300 each time they renew it, but this amount varies).
2. Look for clauses that could provide for your situation
The OTP is initially drafted by the seller’s lawyer – but your own law firm can review the terms, and request amendments (this is why it’s important to have a conveyancing firm hired from the get-go).
In some cases, there may be provisions for the situation you’re facing. This is mainly a pre-emptive step however, so make sure your lawyer is thorough in covering eventualities specific to your situation.
As an aside, some buyers ask their conveyancing lawyer to put in provisions for situations in which a co-borrower passes away before the transaction is completed. While unlikely, such situations have happened before, and it’s worth considering.
3. If it’s a loan approval issue, approach non-banking FIs
If you’re having trouble securing a loan after signing the Option, then it’s time to cast your net wider. Besides approaching other banks, consider non-banking Financial Institutions (FIs), such as Hong Leong Finance – they may sometimes disburse a loan in cases where a bank will not.
The interest rate may be a bit higher, but it may be worth paying compared to losing your deposit and the property.
Given the short amount of time you have, it may not be feasible for you to approach a dozen different lenders. Drop by Stacked Homes and contact us, and we can point you in the right direction.
In future, to minimise these situations, get Approval In Principle (AIP) from the bank you intend to use. This will ensure you can get the loan before you put down the Option.
4. Rope in another co-borrower
If your income situation has changed, and you’re struggling to qualify for a loan, then it may be time to add another co-borrower. This typically involves working children, who can contribute to the mortgage; otherwise its parents and siblings.
Note that this does mean sharing ownership of the property: there could be consequences in future, such as if you want to sell the property but the co-borrowers disagree (or vice versa). Also bear in mind that, if your children become listed as co-owners, they cannot later apply for a flat (as they already own a property), and would pay additional stamp duties on any “second home”.
As such, be clear on the consequences before you go head. It might be better to lose the deposit, than to end up with a massive family feud later. But you can also use this as a stopgap solution, and later take over the co-borrower’s share (speak to your lawyer on how to do this smoothly, and as cheaply as possible).
5. Appeal to the seller
This is the last resort – pleading with the seller and appealing to their better nature. This is admittedly a long shot, but some sellers (e.g. HDB if you’re buying a new flat from them) are more inclined to be lenient.
In some cases, sellers have returned at least a portion of the deposit. There’s no harm in trying, and some sellers can empathise if you’re in a truly tight situation.
To avoid these situations, always get Approval In Principle (AIP), and work closely with your law firm in drafting the OTP
Getting the AIP should be the first step before looking for a property. It minimises the odds that you’ll fail to get a loan, after putting down the deposit (barring truly unpredictable crises, such as job loss right after signing the OTP).
You should also be picky over the Option to Purchase – don’t just rush to accept it. Ensure that you have a way out – if something unexpected happens between the OTP and the actual Sales & Purchase Agreement.
If you have trouble understanding any of these terms, or need to know the right person to approach, you can message us on Facebook.
The questions our readers send in are rarely about the market in general. They’re about a home they’re considering, a timeline they’re working towards, or a trade-off they’re trying to make.
That’s where we usually help readers go a step further, applying the same research and decision-making framework behind our articles to their own situation.
If you’re facing a similar decision and would like someone to help you think it through before you commit, you can book a one-to-one consultation here.
And if you simply have a question or want to share a thought, feel free to write to us at stories@stackedhomes.com. We read every message.
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