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Buying HDB Resale : How to Minimise COV

Posted by Jayson Ang on January 20, 2023

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TLDR

Understanding Cash Over Valuation (COV) is crucial when buying a resale HDB flat in Singapore. COV is the additional amount paid above the property’s official valuation. Factors influencing COV include location, flat size, floor level, age, estate type, and unique features. To minimize COV, research HDB resale flat prices, secure the Option to Purchase (OTP) before valuation, or consider applying for a Built-To-Order (BTO) flat. Ensure financial readiness by keeping Total Debt Servicing Ratio (TDSR) below 55% and mortgage payments under 30% of gross income.

Buying a HDB Resale Flat : How to Minimise Cash over Valuation COV

Navigating the resale HDB flat market can be costly, particularly when the asking price ends up being higher than the appraised value – commonly referred to as Cash Over Valuation.

Despite the economic turbulence caused by COVID-19, the property market has demonstrated tremendous resilience. In June 2021, 19 resale million-dollar flats were sold and the proportion of HDB buyers who paid Cash Over Valuation rose from 1 in 5 in 2020 to 1 in 3 this year. To top it off, a recent buyer paid an astounding S$158,000 in COV for a four-room HDB flat in Tiong Bahru!

It’s time to face facts: when you’re shopping for a resale property, you’ll be at the mercy of market forces (aka fluctuations in daily pricing). Taking into account all the factors is important, but let’s not forget Cash Over Valuation (COV). The bad news is that it can make a big dent in your budget.

What is Cash Over Valuation?

If you plan to purchase a property and the amount exceeds its official valuation, this additional amount is known as the Cash-Over-Valuation (COV).

Bear in mind that the COV must be paid in cash without the assistance of CPF, grants or a home loan, resulting in an increased cash outlay – but the amount of the COV could depend on the characteristics of the property.

How Do I Calculate A Flat’s COV?

Let’s suppose a HDB-appointed valuer appraises a seller’s property to be worth $540,000 – however, due to its desirable location, you and the seller have mutually agreed to a transaction price of $550,000.

Cash Over Valuation = $550,000 – $540,000 = $10,000

This means that you would have to pay $10,000 in COV.

Buying a resale flat may not always result in COV; you could even haggle a price that turns out to be Cash At Valuation (C.A.V), meaning that the final price equals the HDB valuation.

However, if you’re lucky, it could even end up as Cash Under Valuation (C.U.V.), i.e., the flat is sold at a bargain lower than its actual value.

Despite The Rise In Cash Outlay, Why Do Buyers Persist In Paying COV?

If potential buyers believe the flat is worth the investment, they may decide to pay out-of-pocket for the COV. In the resale market, some houses are more attractive and sought after than others, and can therefore command a higher price – a price that is determined by a range of factors.

What Elements Play A Role In Determining The Levels of COV?

#1 Location, Location, Location

Potential buyers may be willing to invest in a property simply due to its attractive location – something that most BTOs can’t offer. Consider its proximity to renowned schools or how close it is to an MRT station, making the daily travel time a breeze!

#2 Flat Size, Age And Floor

The size, floor level, and age of a flat all factor into how it fares in the resale market. It’s widely known that larger flats tend to command higher prices, and the same goes for those situated on higher floors, offering spectacular vistas. Additionally, newly-MOP flats are highly sought after, allowing the new owner to enjoy a prolonged lease.

#3 Mature Estate

Living in a mature estate comes with a hefty price tag, but it’s worth it! After all, you get to be surrounded by a vibrant neighbourhood, plentiful cheap eats, and all your loved ones. Not to mention that, unlike BTOs, mature estates are already well established, so no more feeling like you’re in the middle of nowhere!

#4 Exceptional Features

The news is often abuzz with reports of million-dollar HDB transactions, and certain flats such as maisonettes, executive apartments and jumbo flats, which are increasingly hard to come by, are driving up the price to astronomical levels.

#5 Lack Of Supply

As demand for resale flats surpasses supply, buyers become more willing to pay premium prices to get their hands on a home swiftly, thus giving sellers the chance to benefit from higher prices and ultimately, more profit.

Ways To Minimise COV

Do Your Research

Doing your due diligence is essential in any transaction, especially when it comes to real estate. Nowadays, the prices of homes are far more transparent – you can easily check the daily HDB transactions to get an idea of how much properties are going for in your desired neighbourhood, be it Hougang, Yishun or Jurong, or the type of flat, such as a 4-room or 5-room unit.

We are fortunate to have an abundance of free tools at our fingertips. Get started by looking into HDB’s Resale Flat Prices webpage, updated daily. With the help of this, you can review the transacted prices of resale flats over the past two years. Just filter your search according to your needs, including the ideal price range for you.

Secure The Otp Before Receiving The HDB’s Official Valuation

Once the Option to Purchase (OTP) has been secured, the transaction price is typically fixed, even when the apartment’s valuation comes in at a much greater value.

To address the worrying trend of rapidly increasing Cash-Over-Valuations (COV), from March 10th, 2014, all valuation requests have to be made following the acquisition of an OTP.

Alternatively, You Can Consider Going For A BTO Instead

If you wish to stay clear of the volatile COV market, then applying for a flat directly from the government may be your best bet. Such flats tend to be much more affordable, and unfortunately, it may be difficult to get chosen for one of the more sought-after projects.

However, if you’re fortunate enough to be selected, you may find yourself in a great position when the flat reaches its MOP – although you may have to wait a couple of years before moving in!

In Conclusion

It’s thrilling to find a property that meets all of our needs, but be aware that it likely won’t come cheap. As buyers, it’s critical that we don’t find ourselves in a situation where the home loan repayments are too much for us to handle in the long run.

To avoid this, ensure that your Total Debt Servicing Ratio (TDSR) is no more than 55% of your gross monthly income and that your mortgage payments don’t exceed 30% of your gross income each month.

Final Thoughts

Carry out an in-depth financial analysis to guarantee you are making wise decisions for the near future and can confidently stand behind your decisions.
Also take your timeline and family wishes into account, plan ahead and provide your family with a sense of security so that you can proceed with peace of mind.