Fear of Missing Out - Beware Agents' Hype On New Home Sales and Prices, Companies & Markets - THE BUSINESS TIMES

07/07/2020 Fear of missing out?
ear of missing out? Beware agents' hype on new home sales and prices, Companies & Markets - THE BUSINESS TIMES
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Fear of missing out? Beware agents' hype on new

home sales and prices
 THU, JUN 25, 2020 - 5:50 AM
KALPANA RASHIWALA  kalpana @sph.com.sg  @KalpanaBT
There has been much hype generated by some property agents about the relatively strong primary-
market private housing sales volumes during the recent "circuit breaker" lockdown period - despite
restrictions that curtailed developers' ability to launch new projects. ST PHOTO: KUA CHEE SIONG
THERE has been much hype generated by some property agents about the relatively
strong primary-market private housing sales volumes during the recent "circuit breaker"
lockdown period - despite restrictions that curtailed developers' ability to launch new
projects.
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07/07/2020 Fear of missing out? Beware agents' hype on new home sales and prices, Companies & Markets - THE BUSINESS TIMES
Some agents are also telling potential buyers that while developers were more
amenable to discounts during the two-and-a-half-month period when show ats were
shut, they are now more inclined to hold rm on their list prices. Buyers are also being
told that some developers may be even contemplating raising prices.
This sounds counter-intuitive given that Singapore is staring at a severe economic

recession and rising unemployment.
It may be wise for discerning homebuyers to be aware of some of the things going on in
the property market.
These are not new - they rst surfaced after the July 2018 property cooling measures
took e ect - but worth highlighting as some market observers say they have been at
play behind some of the bullish sales gures being touted of late.
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The rst is the practice by some developers of continually re-issuing options to purchase
(OTPs) to buyers upon expiry - without any forfeiture of booking fees.
Typically, a developer of a private residential project issues an OTP after a buyer has
paid a booking fee of 5 per cent of the purchase price of a property. Within two weeks
from the OTP date, the developer has to send the sale and purchase agreement (SPA) to
the buyer.
Within three weeks of receiving the SPA, the buyer is required to exercise the option by
signing the SPA and returning it to the developer.
The purchaser has to pay the buyer's stamp duty and, if applicable, also the additional
buyer's stamp duty (ABSD) within 14 days of exercising the option (that is, the date of
signing the SPA).
The remainder of the downpayment to the developer - 15 per cent of the purchase price
- has to be paid within eight weeks from the OTP date.
If the buyer does not exercise the option by the stipulated deadline, a quarter of the
booking fee - which works out to 1.25 per cent of the purchase price - will be forfeited to
the developer.
So what would make a developer want to keep re-issuing an option to a buyer upon
expiry, without any forfeiture of the booking fee?
In the face of a softer private residential property market, it helps developers to lock in
sales early amid competition for buyers - and chalk up the requisite percentage of sales
in their project by the timelines stipulated by their lenders as part of their loan
covenants. Of course, good sales gures also help to boost sentiment in the property
market, in turn drawing more buyers including the fence sitters.
This sales tactic of continually re-issuing the OTP is more likely to be used by a
developer for a project with a large number of units.
What motivates a buyer to enter into such an arrangement?
Typically, agents target nancially tight buyers who feel they will lose out if they do not
buy a private property now; these folks believe that real estate is an investment vehicle
they must own.
Some may still be servicing a mortgage on their HDB at and be hit with a tight loan-to-
value limit if they were to buy a second property. Or they would bust the total debt
servicing ratio (TDSR).
Moreover, Singaporeans pay 12 per cent ABSD when buying their second residential
property.
Taking a gamble
Entering into an arrangement where the OTP is repeatedly re-issued allows a buyer to
take a stab at clinching a private condo unit at a supposedly attractive price in the
current market, while potentially buying some time to sell his or her existing home.
Here is a pitch that some agents use to hook buyers: "Mr Tan, you should be able to sell
your HDB at for S$750,000 next year; and then you'll need a loan for just S$300,000 to
buy this condo unit.
"Why not just commit now, since the developer is giving you a S$3,000 to S$5,000
discount, by paying deposit of 5 per cent of the purchase price to get an OTP?
"In a few weeks' time when the developer asks you to sign the SPA, you can ask them to
re-issue the option. You can keep doing this until one year later; if by then, property
prices have already gone up, you can proceed to exercise the option, since you've
obtained a good price, at a special discount. If the market goes down, you forfeit 1.25
per cent of the purchase price and walk away."
Thus some agents encourage buyers to take a gamble on the property market by
entering into such transactions.
Ironically, agents don't get paid their commissions by the developer until after the OTP
has been exercised, that is, the SPA signed - and the buyer has made the remaining 15
per cent downpayment. But tempting buyers with the re-issue of options strategy can
quickly bump up the initial sales volume and hype a project.
This can then attract more buyers, including those with the means to exercise the OTP
within the stipulated ve weeks - shortly after which the agents can receive their
commissions from developers.
When an agent starts talking with a potential buyer about the possibility of the OTP
being continually re-issued, there is a verbal agreement that this can last for up to one
year or in some cases up to one-and-a-half years - from the date of the rst OTP.
Though not illegal, the practice in all likelihood has the e ect of distorting developers'
sales gures - as there is no certainty that all of the continually re-issued options will
eventually be exercised, whereas the impression given to the public in the interim is that
the units have been sold.
Facing pressure
Here's the second strategy that some agents use, which is in breach of o cial
guidelines.
First, a little history.
The July 2018 cooling measures hit private housing sales volumes, while leaving
developers with a substantial pipeline of launches on sites that they had bought at
successively higher prices during the land-buying spree in the preceding two years.
As a result, developers were facing pressure to sell the units in the new projects on
these sites. By that time, a consolidation in the property agency business had resulted in
just a handful of big players. This put the agents in a stronger position to demand higher
commissions from developers - of 3 to 5 per cent for new project launches, compared
with about one per cent previously.
To help move units, some agents started giving a cut of their commissions to buyers.
This is deemed unethical. So some agents started to get around this by giving the
kickback, dubbed "cash back" arrangement, via a relative or friend of the buyer to avoid
detection. Of late, agents have been labelling these payments as "referral fees".
Call them cash back, kickback or referral fees, such payments that are conveyed by
agents to the buyer, whether directly or through third parties, are in breach of
guidelines stipulated by the Council for Estate Agencies (CEA) and will attract disciplinary
action.
Not all property agencies allow their agents to engage in this practice, though they risk
losing their agents to their competitors who close one eye to their agents indulging in
this practice.
Giving kickbacks to buyers (directly or indirectly) helps boost an agent's chance of

clinching sales.
Developers could have achieved the same sales result by giving a discount directly to the
buyer. But doing so would publicly erode their pricing power as it would reduce the
headline price that licensed developers have to report on their housing sales every week
to the authorities. The lower reported selling price may also lead to a breach in the
covenants of the developer's loan agreement with its bank.
However, when developers pay higher commission rates to motivate agents to close
deals with buyers, it does not a ect the headline price they have to report. In short,
prices are in ated.
This is the second distortion in the property market that those thinking of buying a new
private home may want to be mindful of.
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07/07/2020 Fear of missing out?

COMPANIES & MARKETS 

HOCK LOCK SIEW

Fear of missing out? Beware agents' hype on new

KALPANA RASHIWALA  kalpana @sph.com.sg  @KalpanaBT

This sounds counter-intuitive given that Singapore is staring at a severe economic

Stay updated with BT newsletters

Your email address SIGN UP

What motivates a buyer to enter into such an arrangement?

First, a little history.

Giving kickbacks to buyers (directly or indirectly) helps boost an agent's chance of

HOCK LOCK SIEW SINGAPORE PROPERTY HOUSING

48-year-old man who Amateur traders pile

Phase 3 businesses resigned That was beautiful, whatever

Will DBS' xed-rate mortgage

Wirecard's Braun FairPrice to stop

Wee Tiong MD, Third batch of new

PRINT ARCHIVE MON TUE WED THU FRI SAT

SPH DIGITAL NEWS

© 2020 SINGAPORE PRESS HOLDINGS LTD. REGN NO. 198402668E

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