Buying a Property – Overview of the Legal Process
Author: Patrick Tan and Andrew Wong
For many, buying a home represents a significant milestone in life. However, although buying a home can indeed be a dream come true, the legal steps and processes associated with purchasing a property may be daunting and confusing to the uninitiated. This brief overview of the legal process of purchasing a property serves to make things a little simpler.
- Before deciding to buy a home, there are a few things to consider. As a buyer, you should first ascertain that you are eligible to buy the said residential property. Under the Residential Property Act, foreigners are generally not allowed to purchase certain types of residential property, known as restricted residential property. These include landed property like terrace and semi-detached houses, and strata landed housing not within an approved condominium development.
- Practically, the most common type of housing you would be eligible to purchase if you are a foreigner would be condominiums. Resale executive condominiums can also be purchased by foreigners if they are more than 10 years old.
- Once you know what property you are eligible or ineligible to purchase, you should also consider how you would finance your property. You should note that any housing loan you may want to take out is capped at a 75% loan-to-property value. There is also a total debt servicing ratio of 60%, which means that no more than 60% of your monthly household income can go towards your monthly repayment of all debts. This 60% figure includes your mortgage loan repayments. For executive condominiums, no more than 30% of monthly income can go towards mortgage repayments. Furthermore, there is no guarantee that your bank will allow you take out a mortgage loan on the maximum 75%. You should also consider if you want to use your CPF funds to finance your purchase.
- Depending on your nationality and number of residential properties owned, Additional Buyer’s Stamp Duty (ABSD) may also be payable. This will be in addition to Buyer’s Stamp Duty (BSD) which every property buyer has to pay. For more information on BSD and ABSD rates payable, do refer to the Inland Revenue Authority of Singapore (IRAS) website.
- The process for purchasing resale property is slightly more straightforward as compared to when purchasing directly from a housing developer. There is also generally more freedom for parties to negotiate and agree on terms and timelines.
Option to Purchase & 1% Option Fee
- Once you have settled and decided on buying a property, the seller will usually grant you an Option to Purchase (“Option”) in exchange for your payment of an Option Fee. This Option Fee is usually 1% (or more) of the property sale price and will usually be payable by cheque directly to the sellers. Once the Option is granted, the sellers cannot grant another Option to another prospective buyer until the current Option expires.
- The Option will contain several terms and conditions, including crucially, the mode of exercising the Option and the deadline for doing so. You should note that a failure to exercise the Option in accordance with the prescribed mode and before the stipulated deadline would result in you losing your right to exercise the Option. You would forfeit any Option Fee paid and the property can then be put up for sale to another buyer.
- Please do note that once the Option Fee is paid and the Option granted, the terms and conditions contained in the Option cannot be varied or changed unilaterally. The seller has no legal obligation to vary terms in the Option once granted to you as the buyer.
- You should bring the Option to consult your lawyers as soon as possible before exercising it.
Exercise of the Option
- Prior to the exercise of the Option, your lawyers will conduct various legal searches to protect your interest. These include title searches, and bankruptcy and course book (litigation) searches on the sellers.
- Your lawyers will also carry out several legal requisitions, which are basically formal enquiries to various government bodies such as the LTA, URA and PUB to ensure that there are no future government plans which would affect the property. If any of the legal requisitions are unsatisfactory, there is usually a term contained in the Option which allows you to not proceed with exercising the Option and to allow you to obtain a refund of the Option Fee.
- Assuming all searches are satisfactory, your lawyers would usually exercise the Option on your behalf. In order to exercise the Option, the deposit sum (usually 4% of the purchase sum or more) would have to be paid by cashier’s order. Such a deposit would usually be held by the sellers’ law firm as stakeholder until Completion, and would not immediately be paid to the sellers. As an alternative, the deposit can also be held by the Singapore Academy of Law as a stakeholder. However, the latter is less common in practice as it is more inconvenient and also attracts higher bank charges.
- The timeline for completion will be stated in the Option, and the Completion Date is usually expressed in terms of weeks from the date of the exercise of the Option or in some cases, from the date of the Option. Leading up to completion, your lawyers will advise you on various cashier’s orders you would need to prepare for payment of the balance sum. Your lawyers will also liaise with the bank to execute the mortgage (if a bank loan has been taken out) and with the CPF Board to execute the CPF Board’s security documents (if you intend to use your CPF funds to finance the property).
- On completion, there will be a lodgment of title in your favour. Basically, completion entails the exchange of title for payment of the balance price.
- In contrast to the above section which relates to resale property, this section deals with uncompleted property, or purchases of property directly from Housing Developers. While many of the legal steps outlined are broadly similar, there are some notable differences when buying uncompleted property.
Option to Purchase
- For the purchase of uncompleted property, standard form Options are required by law to be used. For uncompleted property, a Booking Fee of 5% is payable in exchange for the grant of the Option. Within 14 days of the date of the Option being granted, the developer’s lawyers will send the Sale & Purchase Agreement (“SPA”) together with copies of the title deeds to you as the purchaser. This is also required by law to be in a standard form.
Exercise of the Option
- The Option must be exercised within 3 weeks of receipt of the SPA. If not, the Option would expire. For uncompleted properties, if an option is not exercised, 75% of the booking fee paid is refundable.
- In order to exercise the Option, you must sign and returns copies of the SPA before the said expiry date.
- The balance 15% of the deposit is then payable either on the exercise of the Option or within 8 weeks after the date of the Option, depending on what is stated in the Option.
- For uncompleted properties, there is also a payment schedule in which different payments will be made at different stages of construction. The payment schedule for uncompleted properties is set out below:
- The final 15% will paid to the vendor by the Singapore Academy of Law as a stakeholder.
- Please do note that prior to completion, you as a purchaser only have rights under the SPA. Thus, any mortgage executed would be a mortgage-in-escrow, or an imperfect mortgage. This mortgage-in-escrow would be accompanied by a Deed of Assignment to assign rights to the mortgagee bank.
- Upon completion, a Subsidiary Strata Certificate of Title (SSCT) for the unit will be issued.
Disclaimer: Please note that this article is purely for general information and does not constitute legal advice. Readers should seek independent legal advice and consult a lawyer should they require specific legal advice.
Written by: Patrick Tan and Andrew Wong