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COV Singapore: What Is Cash Over Valuation in HDB?

cov singapore
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About one in three buyers has paid COV(cash over valuation) over the resale of HDB units from 2020 till Apr 2021 in Singapore. The figure has increased by more than 30% from 2020. 

Of these COV buyers, six out of 10 paid $20,000 or less, while the other four paid $20,000 or more, according to the Ministry of National Development(MND) data.

Whether the COV amount is high or low is up to an HDB flat’s resale price. The fact is that COV cases have been increasing dramatically after the circuit-breaker period and are more likely to persist.

Why the COV’s Revival in 2022?

The COV comeback has taken HDB flat buyers and sellers alike by surprise. Predicted to continue in 2022 and 2023, the COV will create pressure on potential HDB resale flat buyers. Several factors may explain and will play a crucial part in the increases in COV in the future.

Buyers have a strong demand for the public and private property market. The housing index has undergone 10 straight quarters of growth, from 2020 to Sep 2022. Besides, worldwide inflation caused by supply chain disruptions and the energy crisis increases the pressure on housing prices in Singapore.

The BTO project delays caused by the pandemic have uplifted housing prices in the short term. Finally, the revised HDB resale rules of 2014 have induced the price increase and made the resale market more challenging.

What is COV in HDB?

A COV is a price difference between a negotiated price and the market valuation for a resale HDB flat. The cash-over-valuation(COV) issue occurs only in the HDB resale market when a purchase price of an HDB flat may differ from the market value(actual HDB valuation) issued by the Housing Development Board.

An example to help you understand more:

The Singapore market for HDB resale flats operates based on the “at-arm’s-length” system, which means both buyers and sellers look for an agreed price of a good or service for both parties’ maximum benefits at free wills. 

Therefore, in this case, Mr. Huang, the buyer, discovers an ideal HDB flat and reaches an agreed purchase price of $800,000 with the seller, Mr. Chong. To honor the deal, Mr. Huang pays $1,000 for the option-to-purchase(OTP) of the flat. 

Mr. Huang requested a valuation report from HDB after the OTP payment and found the flat’s value at $750,000 only from the report. He is annoyed because his bank tells him it cannot lend COV, and his CPF account cannot pay for it. The only alternative is the cash option for this price difference.

Mr. Huang has to either retreat from the deal, forfeit the OTP payment, or look for additional funding for COV besides the down payment, that is, a down payment + COV($50,000). The cash-over-valuation may be a financing option for a resale HDB buyer with limited alternatives.

Closeup of accountant counting on calculator and working with table

How do I Check My HDB COV?

Below are several options to help you check if a COV exists in an HDB flat offer. 

Past HDB transaction data

With the HDB resale flat prices portal, you can search for HDB resale transactions about regions and flats similar to the property you are interested in. The e-service allows you to check the transacted prices for resale HDB flats over the past 2 years. HDB updates the data every day.

HDB also offers HDB Map Services to access HDB resale prices for all flat types and block information within 200 meters of a specified HDB block project.

If you think that is not enough, you can use the government’s data department for housing information dating back to the 1990s.

Professional property valuation websites

Besides the authority’s database, numerous property valuation websites provide updated and comprehensive information like a property’s asking prices, transaction data comparisons about prices HDB resale buyers paid, and in-depth analysis for regions you are interested in. Before exploring further, you should maximize the advantages of both the public and private facilities.

For a Seller: How to Maximize Profits with COV?

An HDB flat owner can use the following tactics to profit from a higher COV besides the appreciating value of his HDB unit.

  • You should make a precise estimation of a property you intend to sell by maximizing the public and public tools available online. Only by a close-to-market value price can a seller add an affordable COV a potential buyer can pay.
  • If you have recently renovated or made any value-added improvements to your home, including them in your price estimation is reasonable to cover your costs.

For a Buyer: How to Avoid a COV?

Frustrated by the rising market, you still have options to lower COV by examining the following:

  • The global economy enters the rising interest-rate stage. The typical economic theory states an increasing interest rate environment may dampen property prices because the lower value may reduce or eliminate a COV a buyer has to pay. You should keep an eye on the interest-rate trend.
  • It is necessary to have a thorough understanding of the market around a property you plan to buy. In-depth research and professional advice are 2 channels you should seek.
  • If time is on your side, you should adopt a wait-and-see strategy. Newly completed projects like HDB or other just-finished private houses may impact the existing resale market, including HDB flats. You may take advantage of these and negotiate a better and lower COV.

What Affects COV?

Apart from the above factors, you should include the following criteria into consideration: 

1. Location

A property’s location plays a primary part in determining its price.

2. Property conditions

A valuation on a deserted or an improved flat may lead to different prices.

3. Facilities in the vicinity

The more convenient and accessible facilities a property locates, the more valuable it becomes.

4. Interest rate policy

A higher interest rate may reduce a property price and the COV.

5. Research

Thorough research gets you in a better position to understand the property and the market around it and leads to negotiation for a better deal.

More Questions

1. Is COV a part of a down Payment for an HDB for resale transaction?

No, the authority does not treat COV as a part of a down payment for an HDB flat sale. A buyer makes 2 payments: a formal down payment stipulated on the sales agreement and cash payment on another if a COV occurs.

You may understand more by looking at the following example:

Mr. Chen agrees to buy an HDB flat at a secondary market listed for $700,000. He requests a valuation report from HDB which declares the price is $650,000. In this case, Mr. Chen has to pay a COV of $50,000 plus $97,500(15% down payment of $650,000). The total payment paid is $147,500.

2. How do I pay my COV?

You do not have many alternatives to paying the COV. In the previous example, Mr. Chen cannot use a bank mortgage and CPF savings account to pay for the COV except for cash. Therefore, he must have enough cash to fund the purchase. Another unfortunate option is backing out of the deal!

3. What are the rule changes for HDB resale in 2014?

The new rule states both a buyer and a seller have to agree on a sale price before the flat valuation from HDB is out. The old rule is contrary to the new one, which states a property valuation report issued by HDB could be available before the price negotiation. The purpose of the change was to eliminate the COV caused by the valuation issue.

Since 2014, the median COV paid has been zero annually until 2020, according to MND. However, the COV has been increasing due to the low-interest rate environment and supply & demand issues in both private and public housing markets.

A buyer cannot know an HDB flat’s valuation during a price negotiation and, most of the time, has paid more in COV due to differences between a negotiated price and the valuation from an HDB report. A significant amount in COV may cause financial difficulty for an HDB buyer as cash is the only option to pay for a COV.

Final Thoughts

The current property market in Singapore has a rising trend of COVs many resale flat buyers paid, including HDB flats. Beneficial to sellers, though, high COVs hurt to-be-buyers as traditional funding methods, such as the home loan or CPF savings account, exclude its financing.

Key takeaways:

  • A COV increases a seller’s profits.
  • A COV increases a buyer’s financial burden.
  • A buyer can pay for a COV in cash only.

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