“Sell one HDB unit (Public Housing in Singapore), Buy Two Condos” is the sales pitch of many property agents and it has raised the concern with the market watchers as there are potential risk in these challenging times. The proposition is to sell your HDB flat and use the proceeds to pay for the down payment for two condos. The first condo will be for own stay and the second unit will be for rental income. This strategy sounds far too perfect.
Why use individual name?
The unique selling point will be using individual name to purchase an unit will help to avoid the additional buyer’s stamp duty (ABSD) as each person will hold only one property. This is a saving of 12%. Both buyers must continue to work to meet the requirements for loan-to-value limits and total debt servicing ratio (TDSR) requirement. Since the couple are using individual name to purchase an unit, the TDSR including monthly payments for their property cannot exceed 60 percent of their single income. This means both need to have high income.
Risk of Buying 2 Condos
Potential buyers need to do their sums carefully and consider all scenarios before taking the bait by property agents. The global economy is slowing down and job security is of concern. Property’s value may depreciate as well. The occurrence of both scenarios will cripple the couple’s ability to service two mortgages concurrently.
The couple needs to evaluate whether they have sufficient CPF in their Ordinary Account and they need to calculate what is their monthly mortgage amount through cash portion. The worst case scenario will be no tenant for the second unit and it will be an expense, drawing down from their savings. The couple needs to have additional savings to cushion the monthly mortgage in the event of job replacement and lack of tenant.
Recently, property agents will show to their customers that they themselves have signed the option to purchase to increase the confidence level of the home buyers. When the customers say that they need time to consider, other property agents will show that they are buying the project as well. The property agents want to create a sense of urgency for the customers to make a purchasing decision. If the property agents did not exercise the option to purchase, the developer will forfeit 1.25% of the commission. However, they can negotiate with the developer to waive this penalty with a requirement for them to find another buyer within the next 3 weeks. Unless all else fails, the property agent will forego the deposit and the unit will be classified as “returned unit”. Do note that the commission for new development projects are in the range of 2.5-3%, it means even if the property agent after suffering 1.25% penalty will still enjoy a profit for remaining commission.
This type of sales tactics is deemed unethical. Parc Clematis has sold 316 units and there is only 1 returned unit. Parc Botannia has sold 61 units and there are 38 returned units.
Property investments are illiquid and it means you cannot cash out immediately. In the event of economic downturn, you will not be able to find a tenant. It is not advisable for buyers to plough all cash into property purchase and have at lease one year of cash reserves for mortgage instalments as emergency buffer.