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How to use long options to navigate ABSD/SSD restrictions

An Option to Purchase (OTP) may sound like a bureaucratic acronym, and well, it is. You can’t run away from this legal document whether you’re buying or selling a residential, industrial, or commercial property in Singapore. And before you start dreaming of entering the landed property segment, you’ll need to grasp the basics.

Using options in property transactions

In an option, the buyer forks out 1% of the sales price for a 14-day monopoly to decide, “Should I stay or should I go?”. During this period, the seller cannot possibly issue another option to another buyer; they are legally bound to turn prospects away even if they’re offered a price they can’t refuse. And should the original buyer decide to ditch the deal after two weeks, the seller is entitled to pocket this option fee.

Sure, the Council for Estate Agencies has its idea of what the terms and conditions of an OTP should look like. But the real world is full of nuances, and buyers have the freedom to tweak certain clauses in mutually beneficial ways. Some sellers prefer to get their lawyers involved in drafting these OTPs. In such situations, the realtor merely serves as the negotiator.

Now that we’ve gotten the boring but necessary stuff out of the way, it’s time to look at leveraging options – particularly long options – as a buying or selling strategy rather than an administrative checkbox.

What about long options?

Since OTPs are flexible, a buyer can ask for any option period when they make an offer. Of course, a seller can’t be granting you an option period of two months for an option fee of two weeks. More often than not, the latter increases accordingly, unless the seller wants to sell their property urgently.

The option fee for a longer option period also depends on the seller’s opportunity cost. Namely, how much they could be receiving in rental income if they had leased it out instead. In this situation, a buyer who is really interested could offer an additional 20% to sweeten the deal. 

It's crucial to highlight that buyers utilising a longer option period aren't essentially forking out a higher sales price for the property. Rather, they are committing a larger percentage of it at an earlier stage. A perceptive viewer rightly observed that the "premium" a buyer pays for the option is unlike the premiums in the stock market. This payment isn't an additional windfall for the seller; it contributes to the overall transaction value without the seller gaining extra funds.

How buyers and sellers play the game differently

But why would you possibly need a longer option period? Four letters: ABSD. Imagine stumbling upon your dream home – we know how hard it is for a landed property to check every box – and not being able to dispose of the existing roof over your head. Mr. Tax Man will be knocking on your door and demanding his cut the moment you exercise your option 14 days later. (ABSD on a S$4,000,000 property is a whopping S$800,000. Ouch.)

Buyers with deeper pockets may also see long options as a financial instrument. These can be reassigned from one buyer to another who is willing to take over the former’s position at a higher price tag.

Long options can help sellers buy time, too, especially if they’re stuck in an SSD limbo. For starters, our colleague recently assisted in a transaction involving an option period of 15 months. Sellers may be eager to sell their homes before they’ve fulfilled their SSD and qualified to, especially since the property market has moved upwards in the last year.

How our clients have leveraged them

Now, we’re not saying that all buyers wouldn’t pay ABSD or wait for their SSD period to be up. All we’re saying is that long options are a lesser-known way of buying or selling a house earlier than necessary to future-proof one’s purchase. In other words, it can help you time the market, especially in the segment with so many moving nuts and bolts.

For example, Raama recently managed a transaction involving the typical 1% option fee for a 2-week option period. The seller was banking on a timely exercise as they, too, were eyeing a new home, but their almost buyer unfortunately had other plans. But all hope was not lost. They pocketed the latter’s option fee and used it to prolong the option period for the home they were gunning for. Now, someone out there has a 2% option fee they could pocket if the deal falls through. This is the domino effect at play, and how the cookie crumbles in Singapore’s highly regulated property market.

On the flipside, Jackie recently encountered a seller who requested a longer option period as their SSD period would only be fulfilled four months down the road. Luckily, both the buyer and seller were equally eager to lock in the price. You see, if the buyer had exercised their OTP exactly on the 3-year mark, the seller may have had to pay ABSD. By using long options to “manipulate” the timeline, the seller was able to work around it.

Different horses, different courses

We should probably caveat that the strategies Raama and Jackie shared may not be suitable for you. Leveraging long options successfully depends on the negotiation between a buyer and seller as well as the optimization of both their timelines. We’ve seen cases where prospects fail to pull this off and lose their option fee because they had underestimated the option period required. It goes without saying that extensions can take a toll on one’s time, energy, and finances.

Anyone can do paperwork, but a value-adding realtor will be able to chaperone you from start to end, watching your timeline meticulously lest your journey turns into a financial roller coaster. After all, every cent counts towards your home renovation and other life goals. One size does not fit all, and it’s imperative for us to understand your mindset, portfolio, and goals before you take the above strategies and run with them.

If you’d like to find out more, reach out to me (Harvey Chia) for a non-obligatory chat at 9199 9141.


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