With the recent increase in demand in resale HDB properties, Cash Over Valuation (or COV in short) is coming back to the scene. Many of us who have witness the era of COVs will know what COV is. But for the millennials, who have just started into the real estate scene, they may not be familiar with the term COV.
A Little Bit Overview On HDB Cash Over Valuation (COV)
Up until Mar 2014, valuation was done prior to selling of the HDBs. This put sellers at an advantageous position commanding their asking price with a COV factor included in the negotiation. COV range at that time could even go up to $150,000/- depending on the unit’s location and renovation. Prices of flats were constantly negotiated base on COVs and thus causes price to spiral upwards for the resale HDBs.
In a move to stabilise the market in the long run, Government had stepped in to remove the COV factor in negotiation by switching the procedures to conclude on a price first before buyer gets a valuation for the property. In this way, the projected intention is to allow sellers and buyers to negotiate on transactions prices instead of COV factors.
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Calculating HDB Cash Over Valuation (COV)?
After the change in the new ruling and procedure, and a slower market, COV is less commonly heard of and some millennials may not even know what it is or how it works.
So what exactly is COV? As it’s term suggest, Cash Over Valuation is a cash premium paid over and above the valuation acquired for a property and they can only be paid in CASH.
In Singapore, mortgage loans from HDB or bank are capped with a limit ratio known as Loan to Value ratio or LTV in short. HDB and banks loans up to 90% and 75% respectively of the property’s value or price, whichever is lower.
If your property is sold at $450,000 and the value of the property is $400,000. This means that the property is purchased with a $50,000 COV. In the event of a bank loan, the loan and down-payment structure work out to be like this:
75% Loan to Value : $300,000
20% CPF Down-payment: $80,000
5% Cash Down-payment: $20,000
Total 100%: $400,000 (Property Value)
As you can see, the “extra” $50,000 is not covered by the loan and down-payment structure above. The $50,000 will be paid in CASH, as COV, adding up to $450,000 to fund the purchase.
Note: Stamp duties are calculated base on the higher of the value or the purchase price.
When do i need to pay HDB Cash Over Valuation (COV)?
If you are purchasing using HDB mortgage or making full CPF/Cash Purchase, COV is payable in the form of Cashier Order on completion day.
If you are purchasing using a bank mortgage, COV is required 3 to 7 days prior to the completion of sales in the form of Cashier Orders handed over to your conveyancing lawyer.
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Being on the ground, we notice that COV is making a comeback with the incline of HDB prices and index.
We would suggest to do your homework well before concluding an offer price. Unlike past times before Mar 2014 where valuation is done and we know the COV amount upfront before concluding the deal, the situation now doesn’t allow us to know how much the COV amount will be until we have concluded a price, and this makes it more tricky for buyer to gauge.
A rule of thumb, if the HDB unit might be subjected to COV, work on an estimate of the maximum COV amount you are willing to pay and be prepared to forgo the deposit and walk off if the COV amount is unacceptable. You may want to negotiate for a lower option fee so that if the COV amount is over your perceived expectation, you can walk away with minimal damage.