What’s next after the Option to Purchase (OTP)?

If you’ve only got a minute:

• After negotiating the price, you would need to pay the option fee to secure the Option to Purchase (OTP) from the seller. This grants you the exclusive right to buy the property within a specified period.
• Obtain an In-Principle Approval (IPA) from a bank and apply for a home loan before exercising the OTP to ensure you have the necessary funds.
• Exercise the OTP within the agreed timeframe, sign the Sales and Purchase Agreement, pay the balance deposits, and complete all legal formalities to finalise the property transfer.

After much effort, you’ve finally found your dream home on the resale market. You can’t wait to renovate the home and move in, but several steps are needed between securing the Option to Purchase (OTP) and becoming the owner. Read on to find out what needs to happen before you get the keys in your hands.

An Option to Purchase (OTP) is a legal contract in real estate that grants a buyer the exclusive right to purchase a property within a specified period (typically 2 weeks for private properties and 3 weeks for HDB), in exchange for an option fee. If the buyer does not exercise this right within the option period, the seller has the right to forfeit the option fees and re-list the property for sale.

Read on to find out what needs to happen before you get the keys to your new home.

1. Procuring the OTP

After the price negotiation, the seller (or their appointed agent) proceeds to issue the Option to Purchase (OTP). An OTP is a contract that, following payment of the “option fee”, grants an option to the prospective buyer to purchase the property at an agreed price within an agreed period (typically 2 weeks, although this duration can be worked out between the seller and the buyer).

The issue of the OTP also means the seller ends any negotiations with other potential buyers during this period.

While there isn’t a prescribed guide to the exact content or phrasing of terms within an OTP, most property agents typically use templates provided by their respective agencies. Do carefully review the terms spelt out as the sale of the property will be bound by the contractual clauses listed in it.

To procure the OTP, you would have to pay the option fee, usually 1 to 5% of purchase price for private homes (negotiable) or not more than S$1,000 for HDB flats.

2. Selecting and securing the mortgage loan

Before reaching the OTP and loan application stages, you should already have an idea of how much cash you have on hand and your CPF-OA balances. It is a good practice to get an In-Principle Approval (IPA) from a bank.

While not legally binding, securing the IPA gives you an estimate of the amount of home loan you are eligible for when shopping for a property, reducing the chance of losing your deposit should you fail to secure a mortgage loan.

Once you place your option fee, you will need to apply for a home loan with the bank before exercising the OTP.

Read more: What you need to know before getting a home loan

3. Exercising the OTP

Once the home loan has been approved by the bank, buyers can then proceed to exercise the OTP within the specified timeframe, and then enter into a Sales and Purchase Agreement (S&P) with the seller. Property transactions are typically routine, but the assistance of a lawyer to work on the conveyancing and due diligence is required.

As part of S&P, buyers are required to proceed to pay the balance deposit (4% of purchase price for private properties and less than S$5000 for HDB). The sale will be called off if the OTP is not duly exercised within the specified period, and the option fee will be forfeited.

Do remember to pay the Buyer’s Stamp Duty (BSD) (estimated 3% of purchase price) to the authorities within 14 days of exercising the OTP, plus Additional Buyer’s Stamp Duty (ABSD) if you own more than one property.

Your lawyer will then lodge a caveat on the property. This is an official notice of interest on the property, preventing it from being sold multiple times.

4. Pre-completion

Upon exercising the OTP, you and the seller would have agreed upon a date of completion for the sale, typically in about 10 to 12 weeks’ time. During this time, your appointed law firm will run the necessary checks to ensure that the property can be sold with a clean title, without any other caveats lodged against it or any encumbrances. During this period, a formal valuation of the property will also be carried out by your bank’s or HDB’s appointed appraiser.

On your part, prepare to submit any necessary documents to your bank or the authorities, and make the downpayment as required.

If you are using an HDB loan, the down payment is 20% of the purchase price, which can be paid using cash, CPF Ordinary Account (OA) savings, or both. If you are using a bank loan, the down payment is 25% of the purchase price, with at least 5% required in cash and the remaining 20% using either cash and/or CPF OA savings.

The time gap allows the seller to move out of the property, if they haven’t already, and to ensure that old furniture is disposed of, or agreed repairs completed. This naturally depends on the agreed sales terms – if you are purchasing the property in “as-in” condition or “vacant” possession.

5. Completion of Sales and Purchase

Finally, on the day of completion, make a visit to your lawyers’ office where you will be officially registered as the proud new owner of the property. By now, your lawyer would have already followed up on transferring the remaining 95% to the seller, allowing you to collect the keys to your dream home.

Do note that any maintenance fees, property taxes and other charges associated with the property will take effect from this date of completion.

With these last steps in place, you can commence any desired renovation and start transforming the newly purchased unit into your dream home.

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Check out DBS MyHome to work out the sums and find a home that meets your budget and preferences. The best part – it cuts out the guesswork.

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Alternatively, prepare yourself with an In-Principle Approval (IPA), so you have certainty on how much you could borrow for your home, allowing you to know your budget accurately.

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