CASH OVER VALUATION

Understanding Cash Over Valuation (COV) in Singapore’s Resale HDB Market

by Edrick Chooi 16.10.2024

As Singapore’s property market continues its upward trend, the spotlight has once again shifted to Cash Over Valuation (COV) for resale HDB flats. According to HDB's Q4 2023 flash estimates, this marks the 15th consecutive quarter of rising HDB resale prices. 2023 has also broken previous records, surpassing 2022 with the most million-dollar HDB flats sold in a single year.

This resurgence of COV, in the face of a strong property market, brings challenges and concerns for homebuyers as they navigate the complexities of purchasing a resale HDB flat.

In this comprehensive guide, we’ll break down what COV is, how it impacts both buyers and sellers, and strategies you can use to minimize or avoid it when buying a resale HDB flat.

Defining Cash Over Valuation (COV)

Cash Over Valuation, commonly known as COV, is the difference between the agreed sale price of a resale HDB flat and its official valuation provided by HDB. If the sale price exceeds the valuation, the buyer must pay the difference in cash—this extra amount is referred to as COV.

As the demand for resale flats increases, more buyers are finding themselves having to pay COV as they compete for desirable properties. However, it’s important to understand that COV applies solely to resale HDB flats and not to new Build-to-Order (BTO) flats. When purchasing a new flat directly from HDB, buyers pay a fixed price, which is equal to the valuation.

COV has significant implications for a buyer’s financing options. First, it affects the Loan-to-Value (LTV) ratio, which determines the maximum loan amount a buyer can secure from HDB or a bank. Second, it impacts the Buyer’s Stamp Duty (BSD), which is calculated based on the higher of the two—either the sale price or the valuation. If the valuation is lower than the sale price, it can increase the cash outlay required for the buyer’s down payment.

The History of COV in Singapore’s Property Market

COV has long been part of Singapore’s HDB resale market, but its prominence has fluctuated over the years. Before March 2014, COV was a standard practice in HDB resale transactions. Sellers would often set prices based on the expected COV, and buyers knew they might have to pay significant sums over the valuation.

Recognizing that this practice was driving up property prices unsustainably, the government introduced reforms aimed at curbing COV. In particular, the publication of median COV prices was stopped, and buyers and sellers were required to agree on a sale price before obtaining a valuation from HDB. This made COV less predictable and more difficult to negotiate. As a result, COV prices dropped sharply in the years that followed, and by 2016, the vast majority (around 80%) of HDB resale transactions occurred without COV.

However, the COVID-19 pandemic caused significant disruptions to Singapore’s property market. Supply chain issues, construction delays, and a growing demand for immediate housing created a supply-demand imbalance, pushing buyers back into the resale market. As a result, COV reemerged, becoming more common once again, especially for well-located or rare flat types. This resurgence is a natural consequence of the heightened competition among buyers in the current property market.

How COV Works Today in the Resale Market

While the process of buying resale flats has been revised, COV has made a notable comeback due to increasing demand for flats. The primary reason for this is that buyers, in a competitive market, often bid higher than the valuation to secure the property they desire. The higher the resale price compared to HDB’s valuation, the greater the COV, which the buyer must pay in cash.

For example, if a buyer agrees to purchase a resale flat for $680,000, but the HDB valuation report states that the flat’s value is $650,000, the buyer must pay a COV of $30,000 in cash. The key point here is that COV cannot be financed through CPF savings, housing grants, or loans. It must be settled upfront in cash, which can be a financial strain for many buyers, especially first-timers.

I successfully helped my client purchase a resale 3-room flat in Woodlands without paying COV by applying one of my strategic methods

Estimating and Negotiating COV Before Purchase

One of the biggest challenges when navigating COV is that buyers will only receive the official HDB valuation report after they have agreed on a sale price with the seller. This makes it difficult to predict how much COV they will have to pay. To help mitigate this risk, buyers are encouraged to conduct thorough research on recent transaction prices of similar flats in the same area. HDB’s resale portal and various property websites provide comprehensive transaction data that can be useful for estimating potential COV.

By reviewing recent sales, buyers can negotiate more effectively with sellers. For instance, if recent sales in the area suggest a certain valuation, buyers can use this information as leverage to negotiate a lower sale price and potentially reduce or avoid COV.

What If the Valuation is Lower Than Expected?

It’s important to be prepared for the possibility that the final HDB valuation might be lower than anticipated. In such cases, the buyer will have to pay the COV in cash, covering the difference between the agreed sale price and the valuation. On the other hand, if the valuation exceeds the sale price, the seller is obligated to sell the flat at the lower price, meaning no COV is required.

While paying COV may be necessary in many cases, it’s crucial for buyers to make informed decisions based on their financial capabilities and long-term housing needs.

Factors Influencing COV

Several key factors can influence the HDB valuation and subsequently impact the COV amount:

Condition of the Flat: A well-maintained flat in move-in condition is likely to have a higher valuation compared to a flat that needs significant renovation work.
Size of the Flat: Larger units, such as executive apartments or jumbo flats, tend to command higher prices, leading to greater COV if the demand is strong.
Location: Flats located in prime areas, especially near central business districts, MRT stations, or popular schools, are more likely to have higher valuations and demand, increasing the likelihood of COV.
Amenities: Proximity to amenities such as shopping malls, medical facilities, and parks can boost a flat’s desirability, potentially raising the valuation and resulting in COV.
Flat Scarcity: Unique or rare flat types, such as maisonettes, are in limited supply, often attracting higher offers that lead to significant COV.
Urgency: Buyers who need to move in quickly may be willing to pay more, pushing up COV.

Strategies to Minimize or Avoid COV

While avoiding COV entirely may not always be possible, especially in a competitive market, there are strategies that buyers can employ to minimize the cash outlay:

Conduct Research on Transaction Histories: Buyers should use resources such as the HDB resale portal and property websites to research recent transactions in the area. This can provide valuable insights into current market trends and help buyers form realistic expectations.
Negotiate the Option Fee: The Option-to-Purchase (OTP) agreement requires buyers to pay a deposit upfront, which will be forfeited if they decide not to proceed with the sale. However, buyers can negotiate the option fee to a lower amount to minimize potential losses if the COV turns out to be too high.
Consider BTO Flats: For those who are not in a rush to move in, applying for a new BTO flat may be a better option. Since BTO flats are sold at a fixed price directly from HDB, buyers won’t have to worry about paying COV.

COV Trends and Forecast for 2024

In recent months, there has been a noticeable slowdown in the growth of HDB resale prices. According to flash estimates, HDB price growth decelerated to 4.8% in 2023, compared to the 10.4% growth observed in 2022. Furthermore, fewer buyers are being required to pay COV, signaling a shift in market dynamics.

Although COV may still be prevalent for flats in highly sought-after locations or for rare unit types, the general trend suggests that buyers could have more negotiating power in 2024. Sellers may need to adjust their expectations in response to the changing market environment, and the incidence of COV is expected to decline.

Conclusion

While paying Cash Over Valuation can be a financial challenge for buyers, it isn’t necessarily a bad thing. Many buyers are willing to pay extra for a flat that meets their specific needs, especially when it’s in a prime location or if they need to move in quickly. However, it’s crucial for buyers to carefully assess their budget and do their homework before agreeing to pay COV.

If you’re looking for expert guidance to navigate the resale HDB market and need advice on handling COV, consider reaching out to a mortgage advisor. Whether you’re a first-time homebuyer or looking to upgrade, we’re here to help you make informed financial decisions and find the best solution for your home-buying journey.

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