If you’re in the market for a resale HDB flat, you’ll probably have done your research and might have chanced upon the term Cash Over Valuation, or COV.
For buyers, COV in short is the amount that you’re paying in cash, on top of the flat’s value. And so if you’re planning to buy a resale flat, what you’ll probably be concerned about is the valuation of the flat you’re interested in, and if you’ll have to fork out an alarming amount of money in cash.
After all, HDB resale prices have only been on the rise since 2020, and so it’s not uncommon to hear of absurdly high prices, especially for HDBs in popular estates. We take a deep dive into the nuts and bolts of COV to tell you exactly what you need to know.
How is a flat’s value determined?
Before we dive into what COV exactly is, we first have to understand how a flat’s value is determined.
Truth is, establishing the value of a flat is a complex and dynamic process, and there often isn’t a one-size-fits-all approach that can universally quantify the plus and minus points of a unit.
This is because there are many factors that come into play; for instance, the location of the flat, which floor it is on, its remaining lease, and even which direction the flat is facing – these all play a part in determining a flat’s valuation.
If the flat type is also scarce because the government no longer builds them (e.g. maisonettes), then that will certainly drive up its value as well. For superstitious buyers, even having inauspicious numbers like ‘4’ in the unit number can affect their perceived value of a flat, and so it’s quite often like a game between the buyer and seller to arrive at a selling price that both parties can agree on.
Image credit: HDB
Officially, there’s only one way to properly determine what a flat is worth, and that’s by getting an official valuation from the HDB. In this scenario, a buyer and seller have to first agree on a selling price, after which the seller will then grant the buyer an Option to Purchase (OTP). Thereafter, the buyer must then request for HDB to do a valuation of the flat, at a fee of $120.
What is COV?
So what exactly is Cash Over Valuation, or COV?
Image credit: Rach Teo
As its name suggests, COV is essentially just the difference between the sale price of the flat and how much it’s actually worth. So for example, if you paid $880,000 for a resale unit, and its actual value is only $820,000, then your COV is $60,000. In other words, you’ve just ‘overpaid’ $60,000 for your flat!
Technically, it only applies in scenarios where the sale price is higher than the actual valuation; else, it really isn’t cash over valuation, and it’ll probably be quite sus as to why a seller would be willing to sell a flat lower than what it’s actually worth.
But of course, there are instances when the agreed-upon selling price nicely matches HDB’s official valuation (cash at valuation) or even below its actual value (cash under valuation).
Oh, and in case you’ve missed it, COV only applies to HDB resale units. It obviously doesn’t apply to BTOs because the sellers are HDB themselves, and so it would seem rather odd for what is effectively the government to be overcharging people on public housing. For BTO units, its selling price reflects its true value at the point of launch, and so COV wouldn’t apply.
History of COV
You might be interested to know that the whole COV concept right now is quite different from when it first started out.
In the past, buyers and sellers would negotiate a sale price based on the COV amount, rather than what the flat is actually worth. This is because sellers could get an official HDB valuation before agreeing on a selling price, and in doing so, would tend to negotiate upwards in order to get more profits.
HDB was also publishing COV prices – basically providing a benchmark as to how much you should overpay for the flat you want to purchase.
Naturally, this resulted in skyrocketing prices across the HDB resale market, considering how the whole system worked on a “willing buyer, willing seller” psyche. For instance, If I’m perfectly okay with paying the seller $100,000 more than what the flat is worth just to sweeten the deal and secure the unit, then there really isn’t a problem, is there?
And so in 2014, the government announced that it was radically changing the whole COV concept, and how the HDB resale market would operate. In addition to stopping the publication of COV prices, the whole sales process was reengineered to what it is today – a buyer and seller would have to first agree upon a selling price, and only then will the COV be made known to them.
This helped to somewhat cool prices from soaring too high, and bring everyone back down to earth to negotiate around more reasonable prices.
Implications of paying COV
With all that said, what implications would the COV amount have on your resale HDB buying journey, and what do you need to take note of?
For starters, it’s important to bear in mind that the COV amount cannot be covered by a loan or CPF, and you’ll need to pay this amount upfront in cash.
Given that most of us aren’t rolling with deep pockets, we’ll likely have to finance the HDB resale purchase with a home loan. You’re only allowed to borrow up to a certain amount to finance your purchase, and this is determined by the Loan-to-Value (LTV) ratio which is based on either the valuation of the property or the purchase price, whichever is lower.
Assuming you’re going for the same $880,000 HDB flat we talked about earlier, the LTV ratio will be based on its actual valuation of $820,000. We crunch the numbers to give you a sense of just how much you’ll have to fork out of your own pocket:
As you can see, you’ll have to pay a minimum of $60,000 in cash, and potentially up to $142,000 if you don’t have much left in your CPF account. Not many can afford to pay such a high sum in liquid cash, and so it’s important to not have too high a COV, in order to make your out-of-pocket expenses more manageable.
Another big aspect to consider is how the COV will affect the amount of stamp duty you’ll have to pay. To put it simply, stamp duty is a tax that the government applies on property transactions here in Singapore. If you’re a buyer, you’ll be liable to Buyers’ Stamp Duty (BSD) and if you’re a seller, Seller’s Stamp Duty (SSD).
Image adapted from: IRAS
As it stands, the Buyers’ Stamp Duty (BSD) and Seller’s Stamp Duty (SSD) of a property are determined based on a flat’s purchase price or market valuation – whichever is higher, and so it would be in your best interest as the buyer to lower your purchase price.
Conversely, this lowers your COV to lower the amount of stamp duty you have to pay. In the case of our $880,000 flat for example, the BSD that you’ll have to pay will be about $21,000.
COV trends in 2022
So what have the COV trends been like for 2022?
To be honest, there isn’t an official source for COV data. After all, remember that it was a conscious decision by the government back in 2014 to stop publicly releasing COV data to mitigate rising resale HDB prices.
The most recent data point we can refer to is back in June 2021, when the Ministry of National Development provided some statistics in an oral answer to a parliamentary question on COV trends. To quote the MND:
“HDB resale flat prices registered an increase of 5% in 2020, and 6% in the first half of 2021. The proportion of buyers who paid a cash-over-valuation (COV) increased from around one in five in 2020 to slightly above one in three in the first half of 2021. The majority of buyers did not have to pay any COV, and the median COV has remained at $0.”
While it’s great that the median COV has still remained at $0, what’s interesting is that the proportion of buyers who paid a COV actually rose from 1 in 5 to 1 in 3. It seems like it’s becoming more commonplace for people to pay COV, and there are some possible reasons for this.
It’s very likely that buyers in recent years have become more willing to pay higher prices in order to secure the flat they want.
This could be due to urgency in securing a flat (e.g. expecting more children in the immediate future), coupled with long delays in BTO construction due to Covid. In the broader property market, demand is far exceeding supply, which only results in higher property prices and so the higher likelihood of paying COV.
You may have read that just in the past month, a 4-room HDB flat in Tiong Bahru was sold for a hefty $1.158M. According to reports which cited the real estate agent representing the seller, the flat was officially valued by the HDB at $1M. This meant that the buyer paid $158,000 in COV, which is quite a huge sum, but also reflects the level of demand for that unit.
What can you do to avoid paying COV?
If you’re poised to enter the resale HDB market as a buyer, there are some tangible steps you can take in order to minimise or even totally prevent the chance of you paying for COV.
Image adapted from: HDB
First and foremost, you have to do your homework in gathering research data, especially information from past transactions. One great tool we recommend is HDB’s Resale Flat Price Checker, where you can easily check out past transactions across various estates and property types.
This would help you get a rough gauge of the going price of similar homes in the vicinity of the flat you’re interested in, and so mitigate the risk of overpaying for a flat.
You can also check out various property websites where listings are publicly viewable. This will give you a sense of the average asking price of properties within an estate, and in doing so you can more or less establish if a particular asking price is reasonable or just absurd.
If you want some expert opinion, you can try consulting real estate agents specialising in a particular estate, and they should be able to assist in evaluating what would be a fair price for a resale flat.
Read our other HDB guides here:
- How to get up to $160K in HDB grants
- What is HDB’s Sale of Balance Flats?
- Rent vs resale: which is more worth it?
Cover image adapted from: TheSmartLocal, TheSmartLocal
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