What Is An Option To Purchase (OTP) Agreement?

Whether if you’re buying a new property or a resale HDB, one common term that you probably hear often is OTP, or Option to Purchase.

In Singapore, an Option to Purchase is one of the first few steps of buying a property, and comes before the sales and purchase agreement.

But what exactly is an Option to Purchase?

In this article, you’ll learn what an Option to Purchase agreement is about.

What Is An Option To Purchase Agreement?

An Option to Purchase agreement is a legal contract signed between a buyer and seller of a residential property, and basically gives a buyer the exclusive rights to purchase a property from a seller in the future.

To “reserve” the property from the seller, the buyer must first pay a small booking deposit, also known as the option fee.

In exchange, the seller cannot sell the property to another third party for a fixed period, or known as the option period, and must adhere to the pre-agreed sale price and terms.

In order to make the Option to Purchase agreement as complete as possible, the seller can hire a property lawyer to draft the document out before sending it to the buyer.

Then, the buyer can also hire a lawyer to review the terms and make changes before signing.

Buyers and sellers of HDB resale flats, however, must use the Option to Purchase document specified by the HDB.

Note: Bear in mind that the buyer isn’t obliged to buy the property from the seller after signing an OTP agreement; rather, the buyer can contemplate whether to purchase the property while exploring other options.

When Is The Option To Purchase Agreement Signed?

Typically, the sequence is like this:

1. The seller lists the property on a property listing website
2. An interested buyer will view the property and negotiate the price and terms
3. The seller will hire a lawyer draft an Option to Purchase document and send it to the seller’s lawyer for review
4. Once both parties are agreeable to the terms, the buyer will pay the option fee to the seller, and both will sign the document.
5. Lastly, the Option to Purchase contract will become a legal document. An acceptance copy will also be sent to the buyer

Before the contract is signed, the buyer can request for a property inspection to ensure that everything is in tip-top condition.

Likewise, the seller can also request to view the buyer’s bank loan approval letters if there’s a bank loan involved.

For HDB resales, both the buyer and seller must register their intent to buy and sell on HDB’s portal before obtaining the OTP.

The buyer also has to secure the HDB housing loan first as the OTP can only be issued when there’s a valid HDB Loan Eligibility (HLE) letter from HDB.

Once that’s done, both parties must declare the selling price to HDB, agree on the terms, and sign the OTP agreement.

What Are The Typical Terms Included In An Option To Purchase Agreement?

While there isn’t any one-size-fits-all OTP agreement, it should typically cover these basic things:

1. The option fee, or deposit, which can be between 1-10% the price of the property. For HDB resales, the fee is usually not more than $1,000
2. The option period, which is typically within 14 days. However, this period is negotiable and can even be up to 2 months
3. The details of the property being sold (purchase price, name, area, address)
4. The details of both buyer and seller (names, IC numbers, contact numbers, addresses)
5. What happens if the agreement expires, and whether the option fee will be forfeited
6. Whether if the property is furnished or vacant
7. Obligations of the buyer
8. Obligations of the seller

Is The Option Fee Refundable?

The option fee is usually non-refundable, so if the agreement expires, the seller will keep the option fee and is free to offer the property to someone else.

What If The Buyer Chooses The Exercise The Option To Purchase?

If the buyer decides to exercise the Option to Purchase agreement, both parties will enter a sales and purchase agreement, and follow the terms set by the Law’s Society Conditions of 2012, which include terms like rents, profits, levies, and stamp duty.

Source: PropertyGuru, 27th June 2019, Victor Kang (Photo: PropertyGuru File Photo)