National Development Minister Khaw Boon Wan announced that cash over valuation (COV) figures will no longer be used in negotiating HDB resale deals.
Source: HDB Website
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In this new method, prices must first be agreed upon and option to purchase granted before buyers can request a valuation from HDB. HDB will also no longer give valuations to sellers. In the past, sellers usually got valuations first and then negotiated with buyers over how much more less should be paid. The excess cash over valuation is known as the COV.
The Problem With the Old Practice
The argument behind this change is that the bargaining should be based on recent transaction prices and not the COV. While that is a valid point, COVs have become the benchmark which people compare against, so most people bargain based on recent COVs, Comparing COVs though bring up an issue which is the HDB valuation itself. Nobody views valuations the same way, but taking HDB valuation and applying an across the board COV does make the deal process more rigid.
New Practice Poses a Different Problem
The new practice however poses a different problem. In purchasing of private properties, both the buyer and the seller can request valuations from different banks. The seller has a guideline and the buyer knows how much he or she can borrow based on the valuation. In this case only the buyer gets to apply for valuation and not the seller, so the seller will not know what the valuation is. By not releasing the valuation before the OTP, the buyer might offer a price beyond what the HDB valuation can support and thus not get the desired loan amount.
While it is still too early to gauge the impact of this change, it might lead the buyers to offer a more conservative price range based on recent transaction prices. Prices might be more stable as the buyers may tend to offer closer to recent transaction prices to avoid not being able to get the loan amount.
About the Author
Calvin Yeo is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is an online financial planning platform. He is also a Chartered Financial Analyst (CFA) as well as Certified Financial Planner (CFP).
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