Not everyone is in a position to upgrade to a better condominium or bigger flat after selling their existing HDB flat or private apartment.
In fact, increasingly, I’ve had to advise many HDB flat owners to either stay put or try applying for a Built-To-Order (BTO) directly with HDB, simply because they will lose so much money (or what we know as a negative sale) when they sell their existing property.
Case Study #1
Take Javier and Selena, whom I met a couple of months back, for instance. They have 3 children, and own a modest 3-room flat in Ang Mo Kio Avenue 10, which is far from ideal for their family size.
They purchased their first matrimonial home in 2015 for $380k. And were keen to sell after the Minimum Occupation Period (MOP). Unfortunately after 2017, none of the units in their block transacted above $300k.
This year (2020), a flat in their block was sold for just $238k. What will happen if they were to sell their flat?
Since valuation of flats are usually dependent on recent transactions, it is unlikely that they will be able to sell their flat above $300k.
And for most old flats, chances or prices appreciating is also quite slim. So this is what they can expect:
- They will not get any cash proceeds (profit) from the sale of their flat, which comes as a major disappointment.
- With an outstanding HDB loan at about $280,000, they will need to ensure the sale of their flat is at least $280,000 or risk having to pay the outstanding in cash.
- Loan amount is still substantial as HDB interests at 2.6% means a large part of their monthly mortgage repayment went towards the interest payment during the first few years (instead of the principal amount loaned).
- After settling their loan, it is almost certain they won’t have sufficient to return the CPF funds use + accrued interests for the flat purchase.
- So it is important for them to sell their flat at valuation. If they achieve that, they can request for HDB to “waive” the monies owed to your own CPF Ordinary Account. Having said that, it is still good money lost.
If they are still game to sell, they will need to bear in mind that there are other miscellaneous fees involved – agent fees/ HDB admin fee/ Lawyer fees etc, as well as the funds required for their next purchase.
For their case, they do have savings but insufficient to cover the potential cost involved as one of their children has special needs, so a huge chunk of their income is spent on therapies and a special diet which consists of pricey supplements.
My advice to them was to try to save up more if possible, as they continue to pay off their current loan. And it would be prudent to apply for a BTO which will be much more affordable for them.
Case Study #2
And what about private property owners?
There are no exceptions – a bad property investment can prove to be very costly in the case of private properties.
A few years back, I was introduced to Mdm Lim, a seemingly seasoned investor with multiple properties, through one of my clients.
Mdm Lim wanted to engage my help to sell a 2-bed investment unit at Scotts Square. It was a lovely unit with a splendid view. But the problem was she had purchased it at a jaw dropping $4000psf, at about $3.84m.
And the prevailing psf then was at best $3200psf (or usually lower). Since it was a freehold property, I asked if she would consider holding on to the property for a while longer.
Yet, she still decided to cut losses to sell and re-divert her funds to a better performing asset.
She made a negative sale of close to $1 million.
At the law firm on completion, she jokingly quipped that the only ones who profited in this transaction were myself (the realtor) and the lawyer who was her personal friend.
As a realtor, I hate to see any of my clients making losses.
But it is a very real problem. Like all investment, property purchases come with risks too. For buyers with deep pockets, it may not mean much.
But for common folks like most of us, we really cannot afford to make such a mistake.
Case Study #3
Very recently, I was asked to help a family friend. They had committed to an investment unit two years back through another realtor.
And my friend, the sole breadwinner, was retrenched a couple of months back.
They felt bad to ask for help, but were upset with their realtor for urging them to purchase 2 properties which they now realised was too much for them to bear with the sudden loss of income.
And to make matters worse, their tenant took off without notice, leaving a huge mess for them to clean up.
In their case, I advised against selling which was their initial plan. They would incur seller’s stamp duty (for selling within 3 year from purchase) and they would also be penalised for selling during the bank lock-in period.
And it would most certainly be a negative sale case which will add on to their financial burden. Their immediate concern was to find a replacement tenant to help with mortgage payment. Then, they were also able to apply for the mortgage deferment scheme.
And once they hit the 3-year mark, without clawback from the bank and seller’s stamp duty from IRAS, they would then be in a better position to sell, and hopefully not incur losses (or at least keep it to a minimum).
Glad that they took up my suggestion to put selling on hold.
Sometimes you really need to take a step back, as it can mean tens to hundreds of thousands earned or lost with that one decision.
What most people cannot grasp is that negative sales can occur – even when a property is being sold at a higher price.
In such situations, there is usually no problem settling the loan. But you may have insufficient proceeds to return the full funds used from your CPF OA + accrued interest.
Yes accrued interest could snowball that much. But as long as these sellers sell at valuation (or above), then they can write in to CPF Board to waive any refunds required.
But this also means these sellers end up coughing up cash to settle their brokerage and legal fees for selling.
So as you can see, there are many ways one could get into a negative sale situation. But with careful consideration and planning, there are ways to avoid such situations.
One of the best ways to avoid this is to a regular financial health checkup by regularly logging into your CPF app and check the amount of CPF accrued interest that has built up.
The higher the CPF accrued interest, the greater the chance of a negative sale.
Still unsure? I invite you to drop me a whatsapp message with your questions or enquiries.