Enhanced Contra Facility: Walking The Tightrope (A Case Study)
I first met Ali and Fatimah (not real names) at a house-warming party.
Ali’s uncle and aunt invited me to celebrate with them in their new home. Months before, I had helped them to downgrade to a smaller flat because Ali’s uncle was planning for retirement.
The couple was thrilled after I helped them to sell their Choa Chu Kang executive apartment at $30,000 above valuation and buy a 4-room flat in Choa Chu Kang Central at $40,000 below market price.
In my conversation with Ali and Fatimah, they expressed to me that they intended to upgrade to a bigger flat once their BTO flat fulfilled the Minimum Occupation Period (MOP) in about six months. Their needs were different, with three young children cramping into their 3-room flat in Marsiling. I left with them my name card.
Six months passed, no news from Ali.
I dropped them a message and finally heard from them two months later. Later, I found out that they had approached other property agents. There are a lot of competitors out there! It was only the positive feedback and strong recommendation of Ali’s uncle that convinced them to engage my service. That’s the power of referral! (Don’t we all buy things by first reading all the reviews?)
At our first meeting, I soon learned that Ali and Fatimah’s case was not so simple.
The first challenge: how would they be able to upgrade from a 3-room to a 5-room flat with no cash reserves?
What is Enhanced Contra Facility?
Enhanced Contra Facility (ECF) provided by HDB and CPF is to enable a flat owner to sell and buy another resale flat at the same time by using the sale proceeds (cash and CPF) to pay for the purchased flat directly. With this facility, the seller can reduce the cash outlay (might be zero) and the mortgage loan amount needed for the new purchase.
There are a few terms and conditions with ECF:
- The refunded CPF monies cannot be used to pay for the stamp duty and conveyancing fees.
- In a contra case, it involves three parties and two transactions: owner of Flat A, buyer of Flat A and seller of Flat B. Owner of Flat A is the contra party and the other two cannot apply ECF at the same time.
- Both the buying and selling must be submitted together and complete sales at the same time.
- If the sellers of Flat A are Singapore Permanent Residents (SPRs), they cannot be undischarged bankrupt.
- If Flat A and/or Flat B currently have an outstanding private bank loan (instead of HDB loan) or there is a CPF mortgage/charge on either of them, HDB may not approve the application.
- Contra party must take HDB loan for new purchase.
- They must engage HDB lawyer to handle the transactions.
Enhanced Contra Facility Requires Careful Planning
For a enhanced contra facility case, proper and thorough planning is critical. Since there are two transactions (selling and buying) and three parties involved, any misstep would have botched the whole deal.
Even though I had done a number of similar contra cases before, I recognised that there was no room for complacency and every single case must be handled with the utmost care.
The first step was to gather all the necessary information from them: outstanding loan, CPF refund plus accrued interest, current CPF balance, eligibility for any CPF grant, any resale levy, HDB Loan Eligibility (HLE) amount etc.
Assessing Value of Flat
Next was to check for the market value of their flat. Here was a bit of challenge because it had just fulfilled the MOP and there was only one transaction.
With these relevant information, I did a Excel spreadsheet to calculate the estimated sale proceeds and set a maximum budget for the purchase. The good news: it was a ‘mission possible’ even though the couple didn’t have any cash reserves.
I had to check again and again to ensure that all my numbers were all correct. I know there was no room for any mistake. I had to watch out for potential blindspots.
Checking on Flats For Sale
Since in an Enhanced Contra Facility case, where the selling and buying HAVE to take place at the same time, before we even put the HDB flat for sale, we had to check the price range of the 5-room flats in the area where they were focusing. This was to assess if the 5-room flats were within their budget.
To buy the next bigger flat, they needed to sell as high as possible and buy as low as possible. And there must be no cash-over-valuation (COV) for the flat they were purchasing.
Timeline for a Enhanced Contra Facility Case
Timeline was another challenge for a Enhanced Contra Facility case. Since the buying and selling must be completed at the same time, my clients would need an extension of stay after the sale to allow time for renovations. Or if the seller allows for earlier takeover (as in the case of an empty flat), it would also help. The condition for extension of stay must be made known to any potential buyers.
Within the first two weeks of marketing the flat, we received two offers. After some negotiations, one of the parties agreed to a price that was $12,000 higher than the previous transaction though that was two floors lower. (To-date, our price is still the highest record).
But I told my sellers that it was better not to issue the Option to Purchase till they found a flat they wanted. Though they had seen quite a few, none of them matched in terms of prices and requirements.
Luckily, the buyer was willing to wait.
Thankfully, it wasn’t before long we found a humongous 5-room flat (1485sf), right next to the school two of their children are attending and within short walking distance to the upcoming MRT. The uncertain factor was whether the agreed price would incur any COV. I was able to mitigate this risk with proper research.
Well, all things worked out as planned. Both the options for the buying and selling were signed at the same time. There was no COV both for the buying (buyer had already expressed he would not exercised if there was COV) and selling (otherwise my buyers could not afford).
And best of all, Ali and Fatimah moved into their new home just before the circuit breaker!
I was truly happy to be able to help them find their dreamed home. The extra bonus was they ended with about $15,000 cash balance (after paying me for both buying and selling), $20,000 CPF balance and not having to take the maximum loan.
I am now looking forward to their house-warming party after the circuit breaker and hope to be introduced to more potential clients!
If you are a HDB owner and is planning to upgrade or downgrade but not sure how to navigate through this complex process involving the Enhanced Contra Facility, please feel free to contact me or make an appointment with me via the calendar below for a non-obligatory discussion.
Danny Han has been a licensed real estate agent since 2005. He also had five years of experience as a financial consultant. The insights and knowledge he shares in his blogs are the results of years of experience in helping many of his clients in their Property Wealth Planning.
Prior to becoming a real estate agent, Danny was a full-time church pastor (don’t be shocked!) for 23 years. Even now, he is still actively involved in church work and preaches regularly. He has also made six mission trips to Myanmar to-date.
Danny is a foodie, so during his spare time he would go with his kakis to try different “CNG” (cheap and good) food. (Be sure to check out his Holland food blog in this site).
Do feel free to drop him a Whatsapp message for a non-obligatory discussion if you are planning to grow your property wealth.