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Cash Over Valuation - Does It Still Affect You?

· Buying a property

COV

What Is It?

COV is the extra money that buyers have to pay in addition to the market value of the property during resale transactions. 

 

When we as buyers decide to pay more for the flat then the market value, we would then need to fork out extra money to pay for COV.

 

How is market value decided? For HDB flats, the market value will be arrived at by an a HDB panel of independent valuers to ensure fairness. With this, negotiations between buyers and sellers on COV are removed from the sales process. Sellers thus cannot use COV as a benchmark, and hike up their asking prices above it. Negotiations will instead rightly be based on recent transacted prices as a benchmark.

HDB has also stopped publishing quarterly-median COV prices online. In addition, past records of COV prices have also been removed. HDB instead publishes daily prices of resale transactions and buyers make offers based on the updated figures.

This new rule also prevents buyers and sellers from over-declaring a selling price just to get an extra loan amount. Buyers will not do this, simply because they would have to pay for the huge difference between proclaimed selling price and the market valuation.

The introduction of these changes has helped to stabilise Singapore’s property market. The effect is further compounded by the cooling of property prices due to cooling measures, which makes resale units financially attractive. Finally, besides taking into account COVs in your budget, having a suitable loan to finance your purchase is important as well to reduce your costs and take you all the closer to owning that dream home.Suppose you are selling your HDB flat, and want to get $850,000 for it. A HDB valuer looks at the flat, and declares that your flat value’s is only worth $825,000, max. However, you still want $850,000 for the flat; and haggle with the buyer over the premium above the $825,000.

This $25,000 premium or difference will then be the COV.

COVs are paid with hard cash when you are buying the flat. This is because banks or HDB decides the loan amount based on the market valuation instead of the seller’s asking price.

COVs become an issue since sellers often haggle with buyers, or demand the extra money or cash premium above the market valuation of the flat for profit. This makes flats less affordable for buyers.

Depending on market conditions, as well as the location and condition of the resale flat, COVs paid can vary greatly. The location of the flat affects the amenities and facilities accessible to residents. For instance, a buyer who wants to improve their child’s chances of getting into a “branded” school will probably be willing to pay above the market valuation price.

Another factor is the condition of the flat. If your flat looks like it has braved a tornado, the buyer will probably be offering a lower price. They will have to pay for renovation fees after all.

Naturally, many Singaporean home buyers became unhappy and frustrated over this, especially during rising markets. In 2011, median COV prices hit $38,000. More sought-after estates like Bishan even fetched astounding COVs of up to $100,000. A Bishan maisonette actually managed to command a COV of $250,000 and be sold at $1.05 million in end 2013.

However, COV has largely been removed from the negotiation process due to changes introduced by the government since March 2014. If you are either buying or selling a flat, both parties will have to first decide on a price before getting an official valuation. That is, an official valuation will only be sent by HDB after the buyer has received an option to purchase (OTP). Negotiations between buyers and sellers on COV are removed from the sales process. Sellers thus cannot use COV as a benchmark, and hike up their asking prices above it. Negotiations will instead rightly be based on recent transacted prices as a benchmark.

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