Are you in the market to buy a completed private residential property? (i.e. property that is completed/developed).
Then one of the stages to purchasing such a property in Singapore involves exercising an Option to Purchase.
An Option to Purchase is exercised when a buyer decides that he wishes to purchase the property, signs the acceptance copy and pays the balance deposit for the property (see below).
This article will explain 6 things you need to know before exercising an Option to Purchase and will cover the following stages of exercising an Option to Purchase:
- Seller prepares the Option to Purchase
- Buyer reviews the Option to Purchase
- Seller signs the Option to Purchase
- Buyer pays the Option Fee to the seller
- Upon deciding to purchase the property, buyer exercises the Option to Purchase
- Buyer lodges a caveat over the property
1. What is an Option to Purchase and What is it Used For?
In Singapore, an Option to Purchase is an agreement between the buyer and seller of a property, and is the most common way for parties to enter into a contract for the sale and purchase of property.
Typically, the seller grants the buyer an option to purchase the property based on the terms and conditions in the Option to Purchase, in return of a sum of money from the buyer called the Option Fee.
The Option Fee is typically 1% of the sale price of the property, but is negotiable between parties.
The Option to Purchase is used for the prospective buyer to “reserve” the property. This is because for an agreed period of time stated in the Option to Purchase (known as the Option Period), only that particular buyer will be able to purchase the property and not anyone else.
The Option Period is usually 14 days, but may be negotiated between parties.
Thus, the Option to Purchase is useful as the seller is not allowed to sell the property to any other buyers during the given Option Period, while the buyer has the same period of time to consider whether to go ahead with the purchase.
2. Who Prepares the Option to Purchase and How Can You Get a Copy of It?
A draft Option to Purchase is usually prepared by the seller’s lawyer and sent to the buyer’s lawyer. The buyer’s lawyer will then review the terms of the Option to Purchase, and may request to amend and re-negotiate some of the terms.
Therefore, preparing an Option to Purchase possibly requires several drafts, negotiation and input from the lawyers of both parties.
When all the terms are eventually agreed upon, the seller will sign the Option to Purchase and the buyer will pay the Option Fee.
Each party is usually furnished with a copy of the Option to Purchase.
3. What are the Usual Terms in an Option to Purchase and Why are They Important?
There is no prescribed guide as to what terms an Option to Purchase should contain.
Often, parties use standard form templates provided by their property agents, but this is not ideal as every Option to Purchase should be prepared according to the unique circumstances of each sale and purchase.
However, should a ready-made template be used, you should carefully review the terms to ensure that they are favourable to you, as they are legally binding.
It may also be wise to seek legal advice on the Option to Purchase before signing it, as the seller is not obliged to amend the Option to Purchase after it has been exercised.
OTPs generally contain, but are not limited to, the following essential terms:
Details of the parties
This is important to identify the buyer and seller undertaking the Option to Purchase. Some details include:
- Full names;
- Identification numbers;
- Contact numbers; and
- Registered addresses.
Details of the Option to Purchase
This is important to set out the responsibilities of the buyer and seller when undertaking and eventually exercising the Option to Purchase. Some details include:
- Option Fee;
- Option Period;
- Manner of exercising the Option to Purchase; and
- Whether the Option Fee will be forfeited if the Option to Purchase is not exercised in the manner provided, on or before the expiry date.
Details of the property
This is important to identify the exact property and describe its particulars under the Option to Purchase. Some details include:
- The property’s address given in the certificate of numbering issued by the Inland Revenue Authority Singapore (IRAS) Property Tax Division;
- The property’s site or floor area;
- The property’s sale price;
- Whether the property is sold furnished, and if so attach an inventory list;
- Whether the property is sold on an “as is where is basis” (the buyer accepts the property in the current state and condition);
- Whether the property is sold with vacant possession or subject to tenancy (if applicable);
- Whether buyer is going to move in earlier or later than the agreed date (if applicable);
- Whether there is a right to inspect the property before completion of purchase;
- Any warranty on additions and alterations to the property;
- Any other conditions that the property is sold subject to.
Details of the property’s title
This is important to assure the buyer that the property’s title is ready for sale and purchase. Some details include:
- That the title is properly deduced (property has been inspected and determined to have good title);
- That the title is free from encumbrances on completion (discharged from any claims to the property); and
- That the title is in order (property is registered properly).
Incorporation of the Law Society of Singapore’s Conditions of Sale 2012
Most OTPs contain the Law Society of Singapore’s Conditions of Sale 2012 to set out the buyer and seller’s rights and responsibilities. Some pertinent conditions include:
Condition 6:Outgoings, Rents and Profits until Completion
- The buyer is entitled to rents and profits but, is liable for all expenses and outgoings after the completion date (see below).
- The seller is entitled to rent and profits but, is liable for all expenses, outgoings and levies up to the completion date.
Condition 7:Property Tax, Goods and Services Tax, Withholding Tax and Stamp Duties
- The buyer must pay the following taxes; and
- The buyer and seller must pay their respective stamp duties and withholding tax, as necessary.
Condition 9:Late Completion Interest
- The buyer or seller must pay interest if there is a delay in completion due to their own faults.
Condition 15:Notice to Complete
- Either party may give to the other party a written Notice to Complete if the sale is not completed on the completion date, after which parties must complete the sale within 21 days.
Terms regarding replies to legal requisitions
In an Option to Purchase, there typically is a term providing that the sale and purchase of the property is subject to legal requisitions being satisfactory.
A legal requisition is an application made to certain government authorities to obtain certain information about the property in question.
- Requisitions to the Land Transport Authority (LTA) on whether the road giving access to the property is a public street
- Requisitions to the Public Utilities Board (PUB) on whether the land is affected by drainage reserve.
Obtaining satisfactory replies to legal requisitions is important to ensure that the property is not affected by any fees, notices, charges, alterations, or road widening schemes, among other things.
This term helps safeguard the buyer’s interest as the buyer is made aware of the property’s condition prior to buying it and whether there are any actions that he needs to take with regard to the property.
If there are replies that are unsatisfactory, a property valuer may be consulted to determine whether the value of the property would be affected.
Payment of purchase price to seller’s lawyer
This term is essential to ensure that the seller’s lawyer is duly authorised to receive all payments on behalf of the seller.
This protects the buyer in a situation where the seller’s lawyer takes off with the completion money, as payment to the seller’s lawyer is deemed to be payment to the seller.
Agreeing on a completion date
The date of completion is the date where the purchase of the property is completed. This date may be agreed on by parties, but it commonly is “a date that is 12 weeks from the date of the exercise of the Option to Purchase”.
Generally, parties should agree on a date where both parties have sufficient time to prepare to complete the transaction.
Obtaining the seller’s signature
Finally, the Option to Purchase should be signed and dated by the seller and at least 1 witness.
4. How Do You Exercise an Option to Purchase?
Once a buyer decides that he wishes to purchase the property, the buyer may exercise the Option to Purchase before the Option Period ends, according to the manner set out in the Option to Purchase.
As mentioned above, the Option Period is usually negotiated between parties, but a 14-day Option Period is common.
Sign the acceptance copy and pay the balance deposit
Typically, the buyer needs to sign an acceptance copy of the Option to Purchase and deliver it to the seller’s lawyer, together with payment of an amount known as the Balance Deposit.
The Balance Deposit is usually negotiated between parties, but is often 5% or 10% of the sale price of the property, less the Option Fee.
Upon the signing of the acceptance copy and payment of the Balance Deposit, the contract for the sale and purchase of the property is concluded.
The date of the contract is the date of acceptance by the buyer.
It is not mandatory for parties to sign an additional sale and purchase agreement after exercising an Option to Purchase, as the terms and conditions of any sale and purchase agreement would likely be identical to those in the Option to Purchase.
Sign a caveat
Immediately after the conclusion of the contract, the buyer’s lawyer should lodge a caveat in the Registry of Titles (where the property is registered under the Land Titles Act) or the Registry of Deeds (where the property is registered under the Registration of Deeds Act).
This caveat serves to notify any third-parties of the buyer’s interest in the property, and enables the buyer to know of any subsequent dealings that may affect the property. For example, if the seller attempts to sell the property to another party.
5. What will Happen If the Option to Purchase is Not Exercised within the Deadline?
If the buyer fails to exercise the Option to Purchase within the Option Period, the Option to Purchase expires and the Option Fee is forfeited to the seller, unless the Option to Purchase specifically provides otherwise.
The seller is entitled to keep the Option Fee, and is free to put the property up for sale again.
6. What will Happen If Either Party Wants to Back Out After Signing the Option to Purchase?
If a buyer backs out after having already signed the Option to Purchase, the Option Fee is forfeited to the seller (same as above).
If a seller backs out after having already signed the Option to Purchase, the seller has to refund the Option Fee to the buyer.
Additionally, the buyer may have a claim against the seller for specific performance of the Option to Purchase (i.e. compel the seller to carry through with the contract).
To grant specific performance, the court may look at the conduct of parties to decide whether it would be unjust to allow the parties to go back on their contractual obligations.
Preparing and entering into an Option to Purchase for the purchase of a completed private residential property can be a complex process, as it possibly involves several drafts of the Option to Purchase and lengthy negotiations between parties.
Furthermore, the seller is not obliged to amend the terms of the Option to Purchase once the signed Option to Purchase has been exchanged for the Option Fee.
In this regard, it is ideal to seek legal advice prior to entering or exercising an Option to Purchase, in order to have someone assist you in negotiating for terms that are more favourable to you, and protect your rights as a buyer.
You may wish to get in touch with one of our experienced conveyancing lawyers to assist you with drafting and exercising your Option to Purchase.
- Step 1: Negotiate and agree on the resale price. You and the buyers have to mutually agree on the resale price of the flat. ...
- Step 2: Grant the OTP to the buyers. ...
- Step 3: Buyers to exercise the OTP or allow OTP to expire. ...
- Step 4: Submit the resale application.
What Is An Option To Purchase? An option to purchase agreement gives a home buyer the exclusive right to purchase a property within a specified time period and for a fixed or sometimes variable price. This, in turn, prevents sellers from providing other parties with offers or selling to them within this time period.How much do you pay for OTP? ›
However, you have to pay an Option Fee to the sellers. The Option Fee should be a sum between $1 and $1,000, to be mutually agreed between you and the sellers. Once the sellers have granted the OTP to you, they cannot grant another OTP to other buyers until the OTP granted to you has expired.How much is an option fee? ›
1% of the sales price. Thus, for a home with a sales price of $300,000, a $300 option fee is generally an acceptable amount for a 7 day option period.What is Singapore exercise fee? ›
Exercising The Option To Purchase (OTP)
For private properties, this is usually 4% of the sales price. Along with the option fee (1%), this would form the balance deposit which is typically 5%. For HDB flats, the balance deposit cannot exceed $5,000. This includes the option fee that has been paid ($1,000).
- Open an options trading account.
- Pick which options to buy or sell.
- Predict the option strike price.
- Determine the option time frame.
There are six basic steps to evaluate and identify the right option, beginning with an investment objective and culminating with a trade. Define your objective, evaluate the risk/reward, consider volatility, anticipate events, plan a strategy, and define options parameters.What happens after you buy options? ›
If you buy an options contract, it grants you the right but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. A call option gives the holder the right to buy a stock and a put option gives the holder the right to sell a stock.What is an example of option buying? ›
Example: Stock X is trading for $20 per share, and a put with a strike price of $20 and expiration in four months is trading at $1. The contract costs $100, or one contract * $1 * 100 shares represented per contract. The trader buys 100 shares of stock for $2,000 and buys one put for $100.Can I pay option fee in cash? ›
You pay the option fee to reserve the property of your choice. The tables below show the option fees for the various housing types, all payable in cash. If you choose not to exercise the option, you must be prepared to forfeit the option fee paid.
Exercising the Option to Purchase (OTP) is a major step on any home buyer's journey. Once the OTP has been issued by the home seller, the buyer will be granted exclusive rights to purchase the home at a pre-approved price.What OTP means? ›
What does OTP mean? One-time password (OTP) systems provide a mechanism for logging on to a network or service using a unique password that can only be used once, as the name suggests. The static password is the most common authentication method and the least secure.Who pays for options? ›
Options contracts usually represent 100 shares of the underlying security. The buyer pays a premium fee for each contract.1 For example, if an option has a premium of 35 cents per contract, buying one option costs $35 ($0.35 x 100 = $35).Will option fee be refunded? ›
If a buyer backs out after having already signed the Option to Purchase, the Option Fee is forfeited to the seller (same as above). If a seller backs out after having already signed the Option to Purchase, the seller has to refund the Option Fee to the buyer.What makes an option expensive? ›
Options traders must deal with three shifting parameters that affect the price: the price of the underlying security, time, and volatility. Changes in any or all of these variables affect the option's value.What is fee simple Singapore? ›
There are two main types of freehold estates: fee simple, where a person owns the land indefinitely, without conditions, and upon his or her death, the land passes onto his or her successors (i.e., the closest to absolute ownership); and life estate, where a person owns the land for the duration of his or her lifetime.What is fee simple absolute Singapore? ›
Estate in Fee Simple is a freehold estate and the owner can own it forever. It is also referred to as Grant in Fee Simple (GFS), Grant (GT) or Indenture (IND). It is the best form of freehold in that ownership is absolute without conditions.How to buy options for free? ›
Robinhood and Webull are the few free options trading platforms that have 100% free options trading, both a $0 commission and no per contract fees for online trades. Robinhood and Webull also apply this same approach to stocks, ETFs, and cryptocurrency.What is the safest option strategy? ›
Two of the safest options strategies are selling covered calls and selling cash-covered puts.What are Level 3 options? ›
Level 3 enables the trader to take multiple positions and create complex trades such as spreads, iron-condor, or iron-butterflies. Spreads and similar strategies require in-depth knowledge of option mechanics, and substantial capital to employ.
Options trading may sound risky or complex for beginner investors, and so they often stay away. Some basic strategies using options, however, can help a novice investor protect their downside and hedge market risk.What are the risks of option buying? ›
Risking Your Principal. Like other securities including stocks, bonds and mutual funds, options carry no guarantees. Be aware that it's possible to lose the entire principal invested, and sometimes more. As an options holder, you risk the entire amount of the premium you pay.How long should you buy an option for? ›
We suggest you always buy an option with 30 more days than you expect to be in the trade.How much can you lose by buying an option? ›
The buyer of an option can't lose more than the initial premium paid for the contract, no matter what happens to the underlying security. So the risk to the buyer is never more than the amount paid for the option. The profit potential, on the other hand, is theoretically unlimited.What happens after option is exercised? ›
Exercising a put option allows you to sell the underlying security at a stated price within a specific timeframe. Exercising a call option allows you to buy the underlying security at a stated price within a specific timeframe.What is the most you can lose if you buy an option? ›
Maximum loss when buying options
The maximum loss scenario for bought options is when the option expires out of the money. For a call, this means the stock price was under your strike price at the expiration time. For a put, the stock price would need to be above your strike price.
The most common type of option is a stock option in which the underlying security is stock in a publicly listed company. Therefore, there are various option types depending based on the assets.Which option strategy is most profitable? ›
A Bull Call Spread is made by purchasing one call option and concurrently selling another call option with a lower cost and a higher strike price, both of which have the same expiration date. Furthermore, this is considered the best option selling strategy.Why would someone buy an option? ›
Why buy a call option? The biggest advantage of buying a call option is that it magnifies the gains in a stock's price. For a relatively small upfront cost, you can enjoy a stock's gains above the strike price until the option expires. So if you're buying a call, you usually expect the stock to rise before expiration.Can foreigner buy house in Singapore? ›
Under the Residential Property Act, a foreigner can buy both public housing and private properties.
Cash advance fee
How to avoid cash advance fees: Instead of taking out a cash advance, consider borrowing money from family or friends or take out a personal loan (which usually offer better terms).
You will typically be asked to pay either 1% or 5% of the purchase price in exchange for the developer/seller issuing an Option to Purchase (OTP) in your favour. The remaining amounts can be paid for by a combination of bank loan, CPF and cash.What does exercising mean in options? ›
Exercising stock options means you're purchasing shares of a company's stock at a set price. If you decide to exercise your stock options, you'll own a piece of the company. Owning stock options is not the same as owning shares outright.What is an example of an option period? ›
For example, if the contract effective date is Nov. 1 and the negotiated option period is for ten days, the option period would end Nov. 11 at 5 p.m. local time where the property is located.Can you back out after exercising OTP? ›
The vast majority of OTPs do not enable the seller to back out of the transaction with impunity once the OTP has been exercised. By contrast, the buyer is usually allowed to back out of the deal, although they will forfeit any option fee or deposit that they had to pay in exercising the OTP.What does OTP mean by a girl? ›
OTP is an abbreviation meaning "one true pair/pairing."What does OTP with BAE mean? ›
OTP – One true pairing. This refers to two people or characters that you feel are meant for each other.What is 6 digit OTP number? ›
OTP is a six-digit numerical code sent in real time as SMS to your registered mobile number while performing the transaction. OTP is mandatory for authorizing the following transactions: Registration of beneficiary bank accounts of other banks. Bill payments.Who is the owner of an option? ›
Options are a contract between two market participants: the writer and the holder. The writer is the option provider, and the holder is the person who has the right to buy or sell the asset. In return for that right, the holder pays the writer a premium.Why do option buyers lose money? ›
Options lose value over time due to a decay in time value. So, the longer the option buyer holds onto the position the more is the decay in time value of the option, resulting in losses for him.
The seller of a call option receives a premium when they assume the obligation to sell their shares at the strike price. The buyer benefits by getting the option to purchase the asset at the strike price, no matter if the value of the asset increases above that price in the period of time covered by the contract.What happens if you lose money on an option? ›
If the stock trades below the strike price, the call is “out of the money” and the option expires worthless. Then the call seller keeps the premium paid for the call while the buyer loses the entire investment.Why do option sellers lose money? ›
An option seller may be short on a contract and then experience a rise in demand for contracts, which, in turn, inflates the price of the premium and may cause a loss, even if the stock hasn't moved.What happens if an option I sold expires out of the money? ›
As an option approaches expiry, the contract holder must decide whether to sell, exercise, or let it expire. Options can be in or out of the money. When an option is in the money, it can be exercised or sold. An out-of-the-money option expires worthless.What is the best option pricing method? ›
The Black-Scholes model is perhaps the best-known options pricing method. The model's formula is derived by multiplying the stock price by the cumulative standard normal probability distribution function.Are options worth buying? ›
Options can be less risky for investors because they require less financial commitment than equities, and they can also be less risky due to their relative imperviousness to the potentially catastrophic effects of gap openings. Options are the most dependable form of hedge, and this also makes them safer than stocks.What is the max cost of an option? ›
The maximum value of a call option is equal to the value of the underlying asset. This makes a lot of economic sense. An option allows you to buy a given asset at a certain exercise price.Can you exercise options without selling? ›
Your stock options give you the right to exercise if and when you want to, but you're never obligated to do so. If you choose to exercise your stock options, you can hold on to your company shares or sell them.Can you exercise an option the day you buy it? ›
Note. U.S.-style options can be exercised, or bought or sold, on any day up to the expiration date. For U.S.-style options, the expiration date is the last date that an in-the-money options contract can be exercised.Can I exercise buy option before expiration? ›
The holder of an American-style option contract can exercise the option at any time before expiration. Therefore, an option writer may be assigned an exercise notice on an open short option position at any time before expiration.
A cashless exercise, also known as a "same-day sale," is a transaction in which an employee exercises their stock options by using a short-term loan provided by a brokerage firm. The proceeds from exercising the stock options are then used to repay the loan.What happens if I don't exercise my options? ›
Typically, stock options expire within 90 days of leaving the company, so you could lose them if you don't exercise your options. Most companies accept this as standard practice based on IRS regulations around ISOs' tax treatment after employment ends.How long do you have to exercise an option? ›
As the holder of an equity or ETF call option, you can exercise your right to buy the stock throughout the life of the option up to your brokerage firm's exercise cut-off time on the last trading day. Options exchanges have a cut-off time of 4:30 p.m. CT, for receiving an exercise notice.Which option is exercised daily? ›
An American option, aka an American-style option, is a version of an options contract that allows holders to exercise the option rights at any time before and including the day of expiration.What happens when option expires? ›
Each option has an expiration date, which is when the contract expires and ceases to exist, and a strike price. If the contract is exercised, the underlying security is bought and sold at the option's strike price.What time of day do options expire? ›
Summary. The expiration time is when the options contract becomes void and no longer carries any value. Usually, the last day of trading is the third Friday of the month. However, the actual expiration time is the following Saturday at 11:59 a.m. EST.Is it better to exercise an option or sell it? ›
Often it is more profitable to sell the option than to exercise it if it still has time value. If an option is in the money and close to expiring, it may be a good idea to exercise it. Options that are out-of-the-money don't have any intrinsic value, they only have time value.What happens if you buy an option and it expires? ›
If an option expires in-the-money, it will be automatically converted into long or short shares of stock in the associated underlying. If an option expires out-of-the-money, it therefore expires worthless, and it disappears from the account.Should I wait for option to expire? ›
Is It Better to Let Options Expire? Traders should make decisions about their options contracts before they expire. That's because they decrease in value as they approach the expiration date. Closing out options before they expire can help protect capital and avoid major losses.Do you pay taxes when you exercise options? ›
You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.
A cashless exercise is taxed as ordinary income. The amount taxed is the difference between the strike price (the price you can purchase the stock for) and the price the shares are sold for.