Thursday, August 13, 2009

Property Transactions Made Safer

Some rather good news in the papers today; The Ministry of Law (MinLaw) has made suggestions to improve to the real estate process. There have been cases where lawyers engaged by buyers and sellers to facilitate property transaction have fled with the money entrusted to them. Before, it was difficult to prevent such happenings – there was only so much you could do: source for a trusted lawyer and then trust him/her.

MinLaw has very wisely considered this issue and proposed this solution. Monies will not be paid directly to lawyers for any part of the transaction. The monies will instead to be payable, by cashiers’ order, to the Singapore Academy of Law (SAL) or other MinLaw approved entities. MinLaw is exploring the possibility of banks as the designated entities to hold the monies. The role of SAL and/or banks is to hold the monies for property transactions and only pay out to approved payees accordingly.

What does this entail for the clueless home buyer and seller? Firstly, more obviously, there is no possibility of errant lawyers absconding with your money since no money will be directly paid to lawyers, except the lawyers’ fee.

Secondly, there is no extra hassle for the buyers and sellers. As explained below, buyers and sellers only need to pay the money to SAL by cashier’s order, instead of the current practice of paying to the law firm by cheque. The hassle in applying to SAL to pay out the money to various payees is handled jointly by the buyer’s lawyer and seller’s lawyer, and not by the buyers and sellers themselves. The main hassle I can think of for buyers and sellers is that they have to make a trip down to the bank to get the cashier’s order; other than that, there is really no extra work.

Thirdly, there will not be delays in the completion of the property transaction due to this change. The usual completion time frame is about 3 months from the option date. Since letting SAL hold the money instead of letting individual law firms hold the money is merely a change in recipient and not an extra process, the completion date will not be delayed.

Fourthly, this change also allows for a second layer of checks as SAL pays out the money to various payees (sellers, banks, CPF etc). Before SAL pays the money out, it would check to ensure that the payees are verified and approved, that there is no manipulation of names, especially when it pays out to the individual house seller. This would ensure that the money goes exactly where it should belong to; there is no space for lawyers to manipulate names and the amounts of money.

Below is a brief description the difference between current practice and the proposed change.

A normal private property transaction

For simplicity, assume that the seller has fully paid off his mortgage loan, and the buyer secures 80% mortgage loan.

Option to Purchase (OTP)

Buyer views the house and wishes to buy the house. The purchase price is $1,000,000.

Current practice:

Buyer pays 1% of the purchase price ($10,000) to the seller by cheque and receives an OTP from the seller.

Seller receives 1% of the purchase price ($10,000) from buyer and issues the buyer an OTP.

Proposed Change:

No change at this stage.

Exercising the OTP

Buyer has 14 days to decide whether to proceed with the purchase; seller not permitted to issue another OTP to another buyer within this 14 day period. Buyer decides to proceed.

Current practice:

Buyer pays 4% of the purchase price ($40,000) to the seller’s lawyers by cheque.

Seller’s lawyer receives 4% of the purchase price ($40,000) from buyer by cheque.

Proposed Change:

Buyer pays 4% of the purchase price to SAL by cashier’s order. Seller’s lawyer does not receive any money directly.

4-6 Weeks Later

Upon securing the 80% loan, minus the 5% OTP, there is 15% outstanding. This 15% can be paid with a combination of cash and CPF. For simplicity sake, our buyer decides to pay in cash. Stamp duty is also payable; it has to be paid in cash and can be reimbursed by CPF.

Current practice:

Buyer pays 15% of the purchase price ($150,000) to the buyer’s lawyers by cheque. Buyer’s lawyer will pay the 15% to seller’s lawyer. Buyer pays stamp duty of $24,600 to the buyer’s lawyer by cheque.

Buyer’s mortgagee bank pays (80% - $800,000) to the seller’s lawyer.

Seller’s lawyer receives 15% of the purchase price ($150,000) by cheque. Seller’s lawyer receives $800,000 from the buyer’s mortgagee bank.

Note that it is most likely for the seller’s lawyer to abscond with the money at this point. He effectively holds on to 99% of the purchase price before paying them out to various payees. If the lawyer is handling several transactions simultaneously, he could be holding on to very large amounts of money.

Proposed Change:

Buyer pays 15% of the purchase price ($150,000) to SAL. He also pays the stamp duty of $24,600 to SAL. Buyer’s mortgagee bank pays $800,000 to SAL. Seller’s lawyer does not receive any money directly.

Completing the Sale

Current Practice:

The buyer’s lawyer will pay stamp duty to IRAS on behalf of the buyer.

The seller’s lawyer will pay out the 99% to various payees, including the MCST, bank loan (if any) CPF, and lastly the remaining cash proceeds will be paid to the seller.

Proposed Change:

SAL will verify and check all payees to ensure accuracy. On behalf of the buyer, SAL will pay the stamp duty to IRAS. On behalf of the seller, SAL will pay out to the MCST, bank loan (if any), and lastly the remaining cash proceeds will be paid to the seller.

Therefore, it can be clearly shown that the proposed change eliminates the possibility of the seller’s lawyer holding on to large sums of money. This precludes the lawyer fleeing with the money of possibly several big clients.

I applaud MinLaw for proposing this change to allow for a safer and more transparent method of property transaction, and I am sure many, especially sellers, will embrace it. It may take some time to finalise this change, and to iron out the details, but I’m glad that property transactions in Singapore has taken another step towards transparency and accountability.

If you have any comments or any objections towards this change, do feel free to contact me at so that we can put our brains together and disucss it.


Richard Wan

Huttons Asia


No comments:

Post a Comment