A private contract can help Singaporeans carry out a property transaction when conventional methods would not work.
Some Singaporeans can’t get a bank loan, or don’t want to – they need to find other ways to finance their property. There are plenty of dubious methods (e.g. getting lots of co-borrowers, or borrowing from friends), but let’s look at the no-nonsense method of private contracts. It could work for you, as a buyer or seller.
What Is A “Private Contract” for Property?
A private contract is just a fancy way of saying you come to a deal with the buyer or seller, and then get a lawyer to draft the contract.
For example, say you have a property with an expiring lease. It’s only got 25 years left to go, and there’s no sign of an en-bloc sale. You’re tight on cash for a new house, and eager to make what you can of your current home.
Along comes a landlord, who wants to buy your house to rent it out (tenants don’t care how many years are left on the lease, they still pay the full rental). You agree to sell it for cheap – a mere S$300,000 for your terrace house, which would give you much needed cash for a new home.
But there’s a problem:
The landlord can’t get a bank loan to buy your house, because of the expiring lease. At the same time, the landlord either can’t or won’t pay S$300,000 at one go.
The solution is arrange for a private contract. For example, the landlord might agree to buy your property for S$5,200 a month, over a period of five years. That gives you the money a little bit of interest (you’ll end up with S$312,000).
For the buyer, the first five years’ payment will be partially offset by the tenants’ rental, after which it’s almost pure profit for the landlord. Much better than forking out a huge sum all at once.
All the two of you need is a lawyer, to draft the contract and the terms. That’s a private contract.
(But note that you won’t get to evade any taxes! When the title deed is transferred, the landlord will still have to pay taxes like the Additional Buyers Stamp Duty).
When Should You Consider A Private Contract?
Apart from the scenario described above, there are some other reasons you may prefer to use a private contract, such as:
- The buyer has the cash, but a poor credit rating
- The buyer is willing to pay much more than the valuation, but doesn’t have the cash right away
- You are selling to friends or immediate family
The Buyer Has The Cash, But A Poor Credit Rating
Be careful with these scenarios, as you are taking on a lot of risk.
In some cases, a buyer may have a steady cash flow, but a poor credit rating. An example would be a buyer who has a credit grade of C or below, because they were always delinquent with credit card payments – this either causes their property loan to be declined, or they may need to make a much bigger down payment.
For example, say they want to borrow up to 80 per cent of the property price, but can only borrow up to 60 per cent from the bank.
These buyers could enter into a private contract, to give you a 20 per cent down payment, and then make up the rest in instalments.
Remember though, there’s a reason these buyers have a poor credit score. If they aren’t reliably making payments to the bank, should you really trust them? Consult with your lawyer and wealth manager before taking the risk.
The Buyer Is Willing To Pay High Cash-Over-Valuation, But Doesn’t Have The Cash On Hand
The bank will only loan up to 80 per cent of the property value or property price, whichever is lower. This means that, if the price is much higher than the actual value, the buyer has to make up the difference in cash.
This could happen if the buyer is a homeowner, and not concerned with profits. For instance, they may be entranced with the great view and location of your home, and willing to pay S$90,000 above the actual valuation.
However, they may not be able to come up with the cash right away.
As a seller, you might not want to lose such a good deal. If you’re confident the buyer is sincere, the two of you can share the cost of a law firm’s services, and draft a private repayment contract.
You Are Selling To Friends Or Immediate Family
Say you want to sell your home to your children, or a parent, or a close relative. They don’t have the cash to pay you immediately, and can’t get a bank loan – but they promise to pay over time, or in a few years.
In these cases, you should always get a contract drafted. Never come to a purely verbal agreement, or rely on emails and text message as “evidence” of the deal. Keep things fair and above-board for all parties involved, by using a law firm.
Always Seek Legal Advice When Using A Private Contract
Be careful not to step on the government’s toes, by mistakenly failing to pay relevant taxes, or not filling out the right paperwork.
You should also ensure there are sufficient provisions, if the buyer or seller don’t uphold their end of the bargain. At the very least, make sure you reserve the right to take back possession of the house, if the buyer fails to make payments.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.