BTO vs Resale. Here is why you will need a larger budget.

Are you a first-time property buyer? If you are like the majority of Singaporeans, you will be looking at a HDB flat and weighing your options between a resale and BTO.

In this article, we will list out reasons for the higher cost of resale flats for you to make an informed decision. We will also share our thoughts on whether a resale flat is indeed worth the extra outlay.

Reason 1: More dismantling and demolishing work required

Since resale flats have been lived-in by a previous owner, most will prefer to “tear down” a significant area of the house, giving them a blank canvas to design a home that reflects their personal identity. This greatly increases the extent of dismantling and demolishing works.

All those hacking of walls, unearthing of floor tiles and dismantling of cabinets and wardrobes require heavy work with lengthy man-hours. The additional labour required for such a project will drive up the costs.

Reason 2: More renovation work required

When you purchase a resale flat, especially the older ones, the need for substantial renovation is a given due to its age, larger square area and mismatch of design preferences with the previous owner.

For example, old flats tend to have issues like peeling paint, discoloured doors and cracked floor tiling; rewiring and re-piping are likely to be necessary too. These issues are compounded in older flats with larger floor areas – not just costs of materials but labour as well.

Reason 3: Resale flats have a larger floor plan

These mature flats were built earlier when higher square footage was the norm. If you compare the floor plan between a resale flat and a BTO, you will likely find that the former trumps the latter. A 4-room HDB flat built in the 1990s stretches to about 100 square metres, whereas the same 4-room HDB flat today is about 90 square metres including air-con ledge.

A larger floor plan will place a resale flat as a premium choice, spiking up demand and price for resale flats.

Reason 4: More amenities in the flat’s vicinity

Estates that have existed for more than 20 years are defined as mature. A lot of amenities such as convenience stores, shops, community centres and MRT would have been built over that period of time.

Resale flats, being older flats, are generally found in mature estates, making them more coveted.

It is not uncommon for families with children purchasing a resale flat near a top primary school to stand a higher chance of admission as well as to have a convenient location to the school.

These factors drive up demand and prices, and all else being equal, prices of flats in mature estates are 10-15% more expensive.

Reason 5: Loan does not cover any price above valuation

Cash Over Valuation (COV) is the additional amount that you pay on top of your flat’s actual valuation.

Let’s play out an adverse scenario (from the buyer’s perspective):

  1. A young couple visits a resale flat and negotiates a $900,000 price with the seller

  2. The couple secures the Option To Purchase (OTP)

  3. HDB then determines the actual valuation of the flat (not taking into account market forces of demand and supply) – valuation is revealed to be $860,000

  4. Cash Over Valuation is $40,000

  5. This $40,000 cannot be covered by loans or CPF, and has to be paid in cash

  6. The young couple is saddled with a hefty out-of-pocket $40,000

So, buyers of resale flats have to be wary of such an unpredictable factor, more so for first-time property buyers, who are cash strapped.

Where does this leave us?

To determine whether BTOs are cheaper than resale flats, we should be evaluating based on a person’s circumstances – financial health, urgency of housing need and importance of location.

Let’s play out 2 scenarios.

a) A 28-year-old working in a law firm has a comfortable income of $8000 per month and expects annual wage increments and commissions. He wants to settle down as soon as possible with his longstanding partner of 7 years with an income of $4000 per month and wishes to stay near his parents in Tampines, which is a mature estate. Apart from that, and they want a larger effective square area

He would be suited to purchase a Resale Flat

b) A 24-year-old freelancer’s income varies around $3000 per month. He and his fiancée plan to stay in lesser priced non-mature areas as he has a tight budget for purchasing a house and have no issue waiting as they still have a place to stay. He has no specific preference for any location.

He would be suited to purchase a BTO.

These are just some general guidelines to help you decide what type of unit to get if you are considering between a BTO and Resale flat.

Both BTOs and resale flats each have their own merits. Resale flats offer undeniable benefits such as location-preference, reduced waiting duration, and living in mature estates. Of course, they come at additional costs as detailed in this article. We believe that with the information above, you will now be able to weigh the pros and cons and come up with the option most suitable for you.

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