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I met up with 2 groups of clients recently. Both of them are my long time clients whom I have helped in their properties purchase more than 10 years ago.
Coincidentally, both of them are looking at downsizing.
The first group of client - lets call them Mr and Mrs Teo. Mr and Mrs Teo upgraded from a 3-bedroom condo in Water Place at Tanjong Rhu to a 4-bedroom condo at Costa Del Sol at Bayshore in 2007. That was when their 3 children were all in secondary school.
Fast forward to more than 15 years later!
Their children are married and no longer staying with them. Mr and Mrs Teo are now thinking if they should downsize to a HDB flat as they are also approaching their retirement years.
In another scenario with another client, let's call her Jane.
Jane is a single mum. When I help her in the purchase of her current 2-bedroom condo in The Belvedere, her son was in secondary school. As her son is now studying overseas and has no plans to return after graduation, she is now thinking of downsizing to a HDB flat. This will also allow her to transit to a job which is less stressful.
Are you also in a similar situation?
In different stages of our lives, we upgrade or downsize to accommodate our needs and lifestyle.
Downsizing for young seniors is a good option.
One major attraction of downsizing is the ability to use the cpf/cash proceeds to pay off the next house. This removes the huge financial commitment towards property mortgage and even means additional cash for other uses.
Of course, from a practical point of view, it also means lesser time needed to clean up the house as there will be lesser rooms and space to take care of!
From my experience with clients who choose to downsize, one of the biggest challenges is overcoming their emotions to part with the house. I can fully empathise with them. The house that I helped them purchase many years ago is now a home filled with love and memories.
It is definitely a melancholic and bittersweet feeling.
5 Downgrading Mistakes to Avoid
Whether you can considering to downgrade from a private property (landed, condo etc) to a HDB flat, or from a bigger HDB flat to a smaller one, you need to plan carefully.
In my encounters with clients looking to downsize, I notice some mistakes that were commonly made.
1) Overly optimistic on selling price
Financial calculation plays a huge part in the consideration to downsize.
When planning for the sale of a property, we need to estimate how much the property can fetch in the current marketplace.
Due to the emotional connection homeowners have with their homes, they might sometimes perceive the value of their house to be higher than the fair market value.
It is common to hear comments like this:
"You can't find a place like this anymore".
"I spent $X on renovation a few years ago".
"My house is the best in the area because...."
As a professional realtor, I will research on the following before advising on a fair selling price:
Bank indicative valuation
Recent transacted price
Asking price of existing units for sale
I will prefer to work on a conservative sales price in my calculation. Any price that we achieve above this will be a bonus.
2) Not including “hidden" expenses
Selling your condo at $1 million doesn't mean you will get $1 million proceeds.
When calculating the cash proceeds from the sale, we have to first deduct the outstanding bank loan.
Whatever CPF that has been used by owners need to be returned to the respective CPF account together with the accrued interests. You can log in to your CPF account to check what is the principal amount + accrued interest to be returned after the sale of your property.
Also, do not forget other costs like lawyer's conveyancing fees and agent's commission.
Are you within the lock-in period for your bank loan? If yes, there might be penalties when you sell your property.
Are you selling within 3 years from the date you purchased your property? If yes, you will need to pay the Seller's Stamp Duty (SSD).
So, what are the costs involved in purchasing a property?
The typical costs involved in purchasing a property include Buyer's Stamp Duty (BSD), Additional Buyer's Stamp Duty (ABSD) if applicable, lawyer conveyancing fees and agent's commission.
Are you buying your 2nd subsidised HDB flat such as a BTO flat, resale HDB with grants or a new EC? If yes, do take note of the resale levy.
If you are buying a private property, you might need to fork out the ABSD before applying for remission. This could be a hefty amount so do check on it!
3) Poor timeline management
One question I always ask my clients in our initial meetup is:
Can you sell first before you buy?
Most of the time, their answers will be: "I don't have a place to stay if I sell first!"
Then i will ask the next question:
Can you buy first before you sell?
Most of the time, their answers will be: "My funds (CPF and cash) are stuck in the current house! "
So here comes the golden solution.
You have to buy and sell concurrently!
It is common to see homeowners buying and selling their properties concurrently. Timeline management becomes very important in this scenario.
When downgrading from condo to HDB, it is important to take note of the following:
Completion for condo has to take place at least 3 weeks before the completion of HDB to ensure CPF and cash proceeds from existing property can be used for HDB.
Buyers for existing condo must allow the sellers to continue staying in the condo after completion. This is to ensure there is enough time for sellers to complete their HDB transaction and renovate the flat before handing over the condo. Extension of stay is part of the negotiation when selling the condo.
Sellers can also make use of the bridging loan facility by the bank to ensure a smooth move in/out process.
For clients applying for ABSD remission, it is important to adhere to timeline management. Otherwise it might impact your financial situation
Lastly, if timeline management is not arranged properly, you may have to rent a place before moving into your new house. Anybody who has moved before can testify to the amount of effort and anxiety involved in the whole house-moving process!
4) Ignoring current governmental regulations
You aren’t the only person looking to downgrade to HDB. Over the last few years, we have seen HDB prices soar to the roof with more and more news reports on million-dollar HDBs. One of the reasons being owners downgrading from condo to HDB.
Because of this, the Singapore government has implemented a 15-month wait-out rule for private property owners under 55 to ease the property market.
Fortunately, HDBs with four rooms or less are still available for purchase by those over the age of 55. However, the 30-month wait-out requirement still stands for anybody hoping to be awarded an HDB grant.
For individuals considering purchasing an HDB, the company also offers a right-sizing program called the Silver Housing incentive, which pays a financial incentive to seniors 55 years of age and older who downsize to a smaller 3-room HDB.
5) Failure to recognise that downgrading isn't always the only solution
If you are a private property owner (including an EC after the MOP period), you have the option to take out a home equity loan, also called an equity term loan, on your current property.
With this option, you may unlock your home's equity by using your property as collateral. Consider this as akin to going backward in the process of paying down your house loan; rather than getting a smaller loan, you will be receiving a larger debt in the form of cash.
Banks are willing to give out equity term loans since you (the property owner) have proven yourself to be able to pay your loans on time.
Another consideration you can look into is refinancing with your bank.
If you are having trouble making your existing home's monthly mortgage payment, the banks can look into your financial record and make safer financial planning for you to plan your loans. It could also lower the interest rate and increase the tenure to make it more affordable to pay your loans.
Is Downgrading Always a Bad Choice?
Whether you're downsizing from a landed house, condo, or HDB, knowing the typical blunders made by previous downsizers can guarantee that you make the best choice.
Take your time.
Buying and selling real estate is a large financial commitment. And for most Singaporeans, 43.4% of our average networth is tied to real estate. So if you don’t want to lose a large portion of your networth through bad decisions, take your time to consider your financial future.
Need advice on whether you should downgrade? Make an appointment with me so I can guide you through the process before deciding whether this is the option you should take!
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About The Author
Vivian is an experienced real estate agent who has been in the industry since 2002.
Over the years, she has transacted numerous property deals including HDB & private properties. She is well-versed in policies and regulations involving the sale and purchase of residential properties. She has also handled many transactions involving complicated situations like contra, divorce, administration/probate cases, and decoupling / part-share purchase.
Vivian is also a mother to 2 boys. Being a real estate mom allows her to spend much time with her children as they were growing up. Both boys are avid footballers representing their schools and clubs. She loves watching their games and hardly misses a game whenever they play.
Vivian is an active real estate salesperson and team leader. Call her at 98577714 for your real estate matters, or if you are looking to join the real estate industry.