Most of us know this OTP – When we buy our HDB flat or private condominium, this document will be issued to us by the seller. A downpayment will then be placed at the same time.
I am talking about the ‘Option To Purchase’, and I am sure all homeowners have seen this document in one form or another. Eg the HDB version vs the private residential version. To make things easier, we always call it ‘OTP’ for short and everyone will know what it’s referring to.
However, did you know there’s another ‘OTP’ in the picture which some people may not be aware of? Or they might even be confused due to their almost similar name?
This is the ‘Offer To Purchase’ document – incidentally with the same shortform of ‘OTP’. I will now attempt to illustrate define & the differences between the two, and when these are used in a property transaction. You will realise these documents are used very closely together; and you will probably be better off learning the difference.
Option To Purchase
This is a legal document stating the agreement between the buyer and seller regarding the purchase of a property. When this document is issued, the seller is not able to sell to anyone else other than the buyer. This allows the buyer to “reserve” the unit for an option period before they decide to exercise the purchase. This option period is typically 14 days for private properties and 21 days for HDB flats.
The issue of the Option To Purchase requires the buyer to place a non-refundable downpayment. This tends to be 1% of purchase price for private properties and $1,000 for resale HDB. If the buyer decides not to proceed or the option period lapsed, this downpayment will then be forfeited.
However, if all is good and the buyer proceeds with the purchase – they will proceed to exercise the Option To Purchase and pay the remaining payment. In this case, it will be usually 4% of purchase price for private properties and $4,000 for resale HDB. So all in all, the buyer pays 5% of purchase price for private properties and $5,000 for resale HDB.
Offer To Purchase
The lesser known ‘OTP’. The Offer To Purchase is a legally non-binding document which is actually more of a formal letter to state the buyer’s serious interest in the purchase of property. This is usually prepared for private properties only.
In this document, the content will state the terms of purchase such as property address, offered price, duration of the option period, date of completion of transaction and etc. These terms will help guide the property transaction process. While this is not a legally binding document, it pays to still be careful on the stating of terms in the Offer To Purchase to prevent any conflicts and confusion between buyers, sellers and agents.
The Offer To Purchase can be prepared by the buyer’s property agent to send to the seller, in which the validity of the Offer To Purchase will last for typically 3 days.
Once the Offer is accepted by the seller, that is when the seller or seller’s property agent will issue the Option To Purchase as you see in the above section.
Do I Really Need An Offer To Purchase?
Technically, you can skip the Offer To Purchase and jump straight to the Option To Purchase. However, this comes with its own risks and may not be advisable if you have specific requests. This can be particularly so if say you are an HDB upgrader and you have seen your next dream home. However, there is the issue of selling your flat and this takes time. As such, you may need to state longer option periods while you wait to sell your flat.
By getting your property agent to draft an Offer To Purchase, it will help to state terms to protect your purchase wby allowing a mutual agreement between you and the seller beforehand. This helps to faciliate the process without conflicts.
This is also a standard practice which buyer agents will help to prepare as buyers search for their new homes. So, do make full use of this service if you have an agent helping you already!
Summary
Both may have ‘OTP’ as their abbreviations, but they are very different documents. The Option To Purchase is a legally binding document while the Offer To Purchase is not. One states the agreement between the buyer and seller for the purchase transaction, the other is a formal letter stating intent of purchase.
While both documents state different things, they are produced very close together in a property transaction timeline. The Option To Purchase immediately follows after the acceptance of Offer To Purchase, and this can all be done at the same time. It is thus important to be clear on the difference as you may very well see both documents together.
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