Legal Issues Every Homebuyer Should Know

Source : The Sunday Times, Nov 18, 2007

Don't just leave it to your lawyers and agents. Let's go through six legal aspects of buying property.

Figuring out your options

THE option to purchase is the right to buy a property at a specified price within a specified period of time.

To secure this, the buyer must pay an option or booking fee to the property's developer.

This usually amounts to 5 to 10 per cent of the purchase price for private homes.

If a buyer is granted an option to purchase, the developer has to deliver to the buyer or his lawyer the sale and purchase agreement and title deed within 14 days. The option is valid for three weeks from the date of delivery of these documents.

To exercise the option, the buyer must sign the sale and purchase agreement, and pay the balance of the down payment.

The usual down payment for private homes - comprising the option fee and option exercise fee - is 20 per cent of the purchase price.

If the buyer does not exercise his option, he loses 25 per cent of his option fee.

The developer can sell the property to another party after he refunds to the first buyer 75 per cent of the option fee.

Those buying resale Housing Board flats will use a standard option to purchase form issued by the HDB.

The buyer in this case gets 14 days to consider his purchase after paying the seller a non-refundable option fee of up to $1,000.

This fee is forfeited if the buyer decides not to go ahead with the purchase.

If he does decide to go ahead with the purchase, he signs the same form and pays another fee to the seller to exercise the option. This option exercise fee, together with the option fee, cannot exceed $5,000.

If the buyer abandons the purchase after exercising his option, the owner of the flat can claim damages against him.

Lawyers' role

LAWYERS play a key role in the homebuying process, and they come into the picture once the buyer decides on a property.

A conveyancing lawyer is responsible for doing all the relevant searches on the title deed to a property, to ensure that the seller does not owe any debt to the Government.

Such debts could range from unpaid property tax to money that is owed to the Government over road improvement works nearby, said the head of conveyancing at Lawhub, Ms Winnie Tan.

The lawyer also needs to check to see if there is a road reserve on the property, which would allow part of the property to be acquired by the Government in the future for roads to be built.

This is important as it may affect the value of the property, which may in turn reduce the loan amount you can get to finance it.

If a buyer is taking out a bank loan, the lawyer has to ensure that the relevant documents are ready.

Usually, said Ms Tan, a lawyer is hired after the buyer puts down an option fee or booking fee for the property.

She suggests that buyers could look for a lawyer even before that stage, if they want to avoid forfeiting the option fee should the property turn out to have problems and they have to let the option lapse.

The lawyer's role ends when the title deed is handed over to the buyer.

For uncompleted properties, this could take up to three years. Resale transactions, however, are usually completed within three or four months.

Ms Tan estimates that the legal fees for a typical home costing not more than $1 million, and paid for with Central Provident Fund savings and bank loans, will range from $2,500 to $3,000.

This does not include the $800 to $1,000 usually charged for searches on the property and other associated costs.

Fees and taxes

THERE are various charges you need to take note of when buying property: property tax, stamp duty and agents' commissions.

Commission structures are not fixed under the law, though there are market norms for the different segments such as private homes and resale Housing Board flats.

Buyers of private homes typically do not pay anything to agents, as the agents collect a 2 per cent commission from the sellers.

Buyers of resale HDB flats, however, are charged a 1 per cent commission if they hire the agent. Most sellers' agents also charge buyers a 1 per cent fee if they are not represented by a broker.

This practice has been called into question by the Consumers Association of Singapore because of a possible conflict of interests.

Many agents for sellers, however, refuse to show a flat to independent buyers unless a fee is promised. They argue that an independent buyer would have a higher chance of tripping up in a transaction if he did not have the help of a broker.

Buyers also need to take note of the stamp duty. This is a tax on commercial and legal documents that record and give effect to certain transactions. The duty is payable even if the transaction is aborted.

The stamp duty for the purchase of property is calculated at 1 per cent of the first $180,000 of the purchase price or market value of the unit, whichever is higher.

The rate goes up to 2 per cent for the next $180,000, and 3 per cent for the remainder if the value exceeds $360,000.

Finally, the buyer has to remember the property tax payable for his new home. This is calculated based on the annual value of his home, which is the estimated annual rent it can fetch if it is let out.

This amount, which excludes the rent for furniture and fittings, is determined by analysing rents for comparable buildings and other data, so it changes with market trends.

The property tax on owner-occupied homes is charged at 4 per cent of the annual value. This concession is applicable to only one property at any one time.

If the property is not owner-occupied, the tax rate is 10 per cent of the property's annual value.

This year's Budget included a one-off property tax rebate of up to$100 per year for 2008 as well as 2009. The rebates apply to owner-occupied residential properties.

If you are not Singaporean...

FOREIGNERS can buy condominiums and private apartments in buildings that have six or more storeys, but face restrictions in buying landed homes.

To buy landed property, they need to submit an application to the Government.

They will get the go-ahead only if they are deemed to have made a significant economic contribution to Singapore.

Those buying plots of land in Sentosa Cove, however, were recently allowed to submit a shorter application form and granted fast-track approval.

For public housing, only foreigners who are permanent residents (PRs) may apply for a new flat directly from the Housing Board (HDB) but they have to do this with their Singaporean spouse, child or parent.

PRs are free to buy resale HDB flats on the open market.

Those who choose to buy an HDB flat need to be aware of the Board's ethnic integration policy. This limits the proportion of each ethnic group represented within a block and precinct, to encourage various groups to interact with each other on a daily basis.

If the limit has been reached for a particular area, the owner can sell his flat only to someone of the same ethnic group as him.

Meanwhile, executive condominiums are available to foreigners after 10 years.

These developments usually have the same facilities as condominiums, such as swimming pools and gymnasiums. PRs may buy a new executive condominium with their Singaporean spouse, child or parent.

Insuring your home adequately

BUYING a home is a major purchase for many people.

To make sure that things don't go wrong after your major purchase, you may want to insure your home.

Apart from the standard fire policy that covers losses caused by fire, lightning and explosion, you can also take a home insurance policy that covers destruction to a building, home contents and any renovations carried out.

If your property is mortgaged, the mortgagee will require you to have a fire insurance policy on the outstanding loan amount.

When taking out home insurance, make sure that the sum insured is adequate.

The sum should reflect the total cost of rebuilding or reinstating your insured property to its original state, plus professional fees and the cost for removal of debris, says the General Insurance Association of Singapore.

Market value is normally not used as the sum insured.

To estimate replacement cost, you need to know your property's gross floor area.

As a rough guide, the replacement cost of a medium-quality condominium could fall between $137 per sq ft (psf) and $182 psf, while that for landed cluster housing could range between $152 psf and $182 psf.

You should note that the total claim amount is limited to the total cost of the property or reinstatement.

Valuation matters

A PROPERTY'S valuation determines how much a buyer can borrow to pay for it.

Banks can grant a loan of up to 90 per cent of a home's purchase price, or valuation, whichever is lower.

This means that if the price of a property exceeds its valuation, the buyer has to come up with cash to cover the shortfall.

A buyer can get an indicative valuation for a property before committing to the purchase. This does not involve a detailed inspection.

The bank's offer is subject to the formal valuation confirming the indicative valuation. This figure is usually derived from the bank's own panel of private valuers.

When valuing a property, these professionals consider the current value of comparable projects in the area. Other factors taken into account include the property's location, size, layout, age and condition, as well as its orientation.

Valuers usually take about two to three weeks to complete the assessment.

Mr Eugene Tham, a director of property consultancy Chesterton International, estimates it would cost about $400 to $500 to value a home worth about $1 million.

For resale Housing Board flats, buyers need only to submit a request for a valuation report, which would cost about $200 for three-room or larger flats. The HDB will then randomly assign a private valuer to assess the property.

About two years ago, it was common for buyers and sellers to inflate the price of the flat so the buyer could get a bigger housing loan than he would otherwise be allowed. Such illegal "cashback" arrangements were supported by inflated valuations from the colluding valuers.

The Government, however, clamped down on this practice in 2005, by requiring flat purchases involving withdrawal of Central Provident Fund savings to be supported by valuations carried out through the HDB system.

Such cashback arrangements largely fizzled out after the curbs. Those caught can be fined $5,000 and jailed for six months for giving false information to the HDB.