You will be able to explain how the valuation limits your loan and CPF, and why COV must be paid in cash.
Three days after Farah and Hakim took the option on the Bedok flat, HDB's valuation came back. They had agreed S$620,000. Their guess, from recent sales, had been S$610,000, so they had budgeted S$10,000 of cash over valuation. Farah opened the result with her stomach in a knot, because she had already worked out what a lower number would do to them.
This lesson explains why the valuation matters so much, and how to protect yourself before it arrives.
The valuation is an independent estimate of the flat's market value at the time of purchase. For an HDB resale, HDB carries it out after you request it, once you hold the option. It looks at the flat's size, storey, condition, remaining lease and recent sales of similar flats nearby. Banks lending on private property arrange their own valuations, often before you commit, and you can ask a bank for an indicative one.
The valuation doesn't set the price. You and the seller do that. But it sets two other things.
Both your loan and your CPF use are based on the lower of the price and the valuation.
For the loan, that is the LTV rule from lesson 4.1, LTV limits and the cash you must put in. The bank or HDB lends a share of the lower figure, never of the price you agreed if that is higher.
For CPF, the valuation limit caps how much of your CPF can go into the property, as CPF Mastery: every account and the choices you control, lesson 2.2, Valuation and withdrawal limits, and why older leases are capped, explains. CPF can't pay for value the valuer didn't see.
Whatever you pay above the valuation is called cash over valuation, or COV. The name says how it must be paid. The loan doesn't cover it, because the loan is based on the valuation, and CPF doesn't cover it, because CPF use is capped at the valuation. It comes from your savings.
COV is a negotiation between you and the seller, and it moves with the market. When demand is strong, sellers ask for more of it, and when demand is weak, many flats sell at or below valuation.
Here is what Farah was afraid of, with example figures and the invented 70% LTV and 10% minimum cash share from module 4.
If the valuation came in at S$610,000, as they guessed, the loan would be S$427,000 and COV S$10,000. Their own money towards the price would be S$193,000, of which at least S$71,000 must be cash: S$61,000 as the minimum cash share and S$10,000 of COV.
If it came in at S$590,000 instead, the loan would fall to S$413,000 and COV would rise to S$30,000. Their own money would rise to S$207,000, and the cash part to at least S$89,000: S$59,000 of minimum cash plus S$30,000 of COV. With S$80,000 in savings in this example, they would be S$9,000 short of cash before stamp duty, fees or a single tin of paint.
A S$20,000 drop in valuation cost them S$18,000 more in cash. The price hadn't changed at all.
The valuation came back at S$610,000. Farah breathed out. But the exercise showed them how close to the edge they had been, and they decided they wouldn't have gone ahead at a valuation of S$600,000 or less without renegotiating the price.
For an HDB resale, the official valuation comes after you take the option, so you are already a little committed when it arrives. What protects you is your own estimate, made before you agree a price.
Use HDB's published resale transactions, as in lesson 1.2, Resale flats: market price, but you move in sooner. Find flats of the same type in the same block or nearby blocks, on similar storeys, sold in the last few months. Their prices show roughly where a valuation is likely to land. Adjust for anything that clearly differs, such as a much higher floor or an unrenovated unit.
Then work out the cash you would need at that valuation and at one some way below it. If the lower case breaks your budget, either negotiate the price down or be ready to walk away before you exercise the option, when the only loss is the option fee.
For private property, ask your bank for an indicative valuation before you sign an option. It costs little or nothing, and it gives you the same protection.
For one resale listing, you need three numbers: the asking price, your estimate of the valuation from recent transactions, and the cash you would need to cover any gap, on top of the minimum cash share of your loan. The activity below asks for exactly those.
Take one resale listing and write the price, a likely valuation from recent transactions and the cash you would need for any gap.
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