What is COV when buying a HDB resale flat, and how to deal with it?

By Ryan Ong

Cash Over Valuation (COV) is one of the main factors to consider when buying a resale flat. Unlike buying a new flat, there's a chance that the seller will want a price higher than the official valuation by HDB. This is the COV, and it can result in a higher cash outlay, as well as higher stamp duties. Here's what you need to know about it, if you're looking for a property on the resale market today:

What is COV, exactly?

The COV is the price difference between the seller's price, and the official valuation of the flat. For example, if you agree to buy a resale flat for $500,000, but HDB values the flat at just $480,000, then you are faced with a COV of $20,000.

(COV is only a factor for resale flats – if you buy a new Built-To-Order (BTO) flat, HDB's valuation will be the exact price.)

COV used to be a norm before 2014, and died out after a policy change, but then came roaring back in recent years. As of 2021, around one-third of HDB flats transacted with COV, up from one-fifth in 2020. This is on the back of resale flat prices reaching record highs.

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For those who last bought a flat before 2014, take note of changes to COV

If the last time you bought a resale flat was before 2014, you could have haggled over the COV after seeing the valuation. In other words, you would know exactly what the COV would be.

In 2014, however, HDB changed the rules. Buyers and sellers must now agree on the price first (i.e. the sellers must grant you the Option To Purchase, or OTP). It is only after you’ve agreed on the price that HDB will give you the official valuation. This means you don't actually know how much the COV will be.

In addition, HDB has stopped publishing information on COV rates.

As such, there’s pressure to keep the price as realistic as possible – if it seems the price is much higher than the average for your particular HDB town, chances are you will end up paying some COV.

How does COV affect buyers, besides a higher cost?

For buyers, there are two key concerns regarding COV. The first is that COV is never covered by your home loan, whether you use a HDB loan or a bank loan. In addition, you cannot use CPF to cover COV costs.

For example:

You buy a resale flat priced at $500,000, but valued at $480,000.

The maximum loan amount for your resale flat, using a HDB loan, is 85 per cent* of your flat's price or value, whichever is lower ($408,000). The remaining 15 per cent can be paid in any combination of cash or CPF.

This comes to:

Total loan: $408,000

CPF usage for downpayment: $72,000

Outstanding COV: $20,000

Note that you cannot borrow more money from the bank to cover the COV. As such, you need to plan to have a lot more cash on hand, if you suspect COV will be involved.

The second concern is that your Buyer Stamp Duty (BSD) is based on the higher of your flat price or value (you can see how BSD rates are calculated here). In the case of our $500,000 flat, the BSD would be $9,600.

If there had been no COV, and the price and valuation were both $480,000, you would only have paid $9,000.

So the higher the COV, the higher the stamp duties you'll pay.

*For a bank loan, the maximum amount is 75 per cent of the price or value, whichever is lower

How do you avoid or minimise COV?

1. Check surrounding prices before agreeing to anything

HDB may not publish COV rates, but they do still publish average prices for each HDB town. Check the current prices. If your seller has a price that's way above average, you are probably going to be saddled with COV.

A licensed realtor who has handled transactions in the same town (or even better, the same block) will have a good sense of whether COV is involved. Ideally, you want a realtor who has handled transactions in the area within the past six months, so their grasp on the prices is up to date.

2. Be aware that rare or unusual flat types tend to have higher COV

DBSS flats, the one-of-a-kind Pinnacle@Duxton, or rare maisonette and jumbo flats are more likely to incur COV. These flats have scarcity value and higher price points, and they make up the majority of million-dollar flats. COV is almost a given for these high-demand units.

3. Five-year old flats tend to come with COV

Flats that have only just reached their five-year Minimum Occupancy Period (MOP) tend to be priced higher, with COV. This is because they combine the advantages of being new, and being able to move in right away (you would usually have to wait four to five years for a BTO flat to be built, so these are the best of both worlds).

In recent news, the most expensive HDB resale flat ever sold, at $1.4 million, was at 96A Henderson Road. Notice that this unit had 96-years left on the lease; and its newness was likely a significant contributor to price.

COV may be an unavoidable fact for some home buyers, who cannot bear the long wait times for a BTO flat. However, if you stay prudent and stick to the neighbourhood average, you may still be able to avoid it.

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