Throughout my tenure in the real estate industry, I’ve encountered numerous homeowners who have faced or are currently facing what is known as a ‘negative sale’ when parting with their property. But what exactly constitutes a negative sale?
To understand this, let’s revisit the initial transaction when the homeowner purchased the property. Suppose they acquired a HDB resale flat for $500,000. Fast forward a decade, and when they decide to sell, the market value of the property, affected by lease decay, hovers between $420,000 to $450,000. On the surface, this indicates a potential gross loss of $50,000 if sold at the market price. However, even if they manage to sell it at the initial price of $500,000, would they break even?
Consider this scenario: the homeowner’s total CPF amount, including both principal and accrued interest, stands at approximately $300,000, while their outstanding loan amounts to $175,000. After deducting the CPF refund and the outstanding loan amount, $500,000 – $300,000 – $175,000=$25,000. Not too bad as there’s still a gross profit of $25,000 before the other miscellaneous charges like legal, agency and admin fees.
Now, if they were to sell at the market valuation of $450,000, this would result in a negative sale, where they wouldn’t receive any cash proceeds from the transaction. Understandably, clients who find themselves in such situations often ponder whether it’s wiser to hold onto the property and await a potential price increase to avoid making a loss.
Ultimately, the decision rests with the homeowner. However, after conducting a comprehensive financial analysis, we typically advise homeowners to reconsider their strategy and make a change to a better asset class to minimize the risk of encountering negative sales in the future.
It’s crucial to recognize that the longer the homeowner retains the resale flat, the more the CPF accrued interest accumulates. Consequently, there may come a point where the CPF refund amount exceeds the sale price by a significant margin. Therefore, it’s advisable to periodically review and, through careful analysis, reassess the property portfolio to prevent similar situations from occurring in the future, thereby safeguarding homeowners’ capital more effectively.
Cherlyn Leng