Depository bond
Depository bond is a type of Surety bond - financial instrument frequently present in Australia as a different tool for a money deposit. Commercial and residential real property purchases are much easier with the usage of deposit bonds. Often they get mistaken for deposit insurance. In reality, deposit bonds are financial instruments that correspond to real estate deals. In the place of cash, an emptor will use a deposit bond by offering a deposit bond to the vendor at the time of the transaction.
The consumer and the seller shall determine that the buyer agrees to pay the vendor the sum for the bought property at a future date; at that date custody of the estate goes from the seller to the buyer. Deposit bonds provide the vendor with guarantees that the deposit of the investor is protected and that they will collect it wherever the customer fails to fulfill their duty to the seller. Companies offer deposit bonds when it comes to buying[1]:
- Existing homes
- Vacant lands
- Commercial properties
- Off-the-plans
Buyer
Deposit bonds are generally considered when there is limited accessibility of a potential real property investor to their own money, commonly in other categories of investment assets. Deposit bonds are issued as a certificate, which guarantees the full amount of deposit money needed to purchase the real estate. The issuers of deposit bonds are banks or insurers, on behalf of the buyer[2].
Assurance
Deposit bonds include a promise that payment will occur - that is, they provide the transaction's security. Remember that this is not the same as insurance, which includes renumbering from an incident that could occur if it happens[3]
Mitigation
Insurance companies, as well as banks, have their own deposit bond issuance requirements that people will need to follow. Guidelines for underwriting vary from company to company, but the bond issuers generally look for the following:
- the power to take or have finance approval
- liabilities and assets
The liability is borne on behalf of the investor by the holder of the deposit bond ergo the financial institution or insurance company. If the purchaser fails to meet their contract, the seller is allowed to keep the security deposit for the purchase of the property kept as collateral and instead of cash. Hence, on request, the funds will be immediately paid out to the seller by the bond issuer. The occurrence is shielded no matter the circumstances, being a guarantee[4].
Benefits
Deposit bonds are suitable for borrowers who are rich in capital and low in money[5]
- Don't need to collect money in advance;
- Owners and investors typically have their assets attached to the property and limited cash;
- Some could sell & buy or downside simultaneously and have limited cash;
- Buyers are hesitant to interrupt cash that works more efficiently on term deposits, other funds or do not want to access additional funding, resulting in additional costs and having to pay back over an extended period of time;
- While the risk is higher for longer-term agreements, such as 'off the plan' buyers do not face the possibility of paying a cash deposit that could then be held for an extended period of time if the developer goes into receiving.
Footnotes
| Depository bond — recommended articles |
| Cash bond — Vendor take-back mortgage — Advance funding — Non current liability — Counter guarantee — Credit Facility — Interim financing — Gift letter — Bonds in finance |
References
- Ferguson D., (2018), TExES Social Studies 7-12, Research & Education Assoc.
- General Assembly in Illinois (2006),Journal of The Senate
- Marston R. C. (2014), Investing for a Lifetime: Managing Wealth for the "New Normal", John Wiley & Sons
- Mixed Claims Commission, United States and Germany, (1928), Rules Applicable to Debts, Bank Deposits, Bonds, Etc, U.S. Government Printing Office
- Petitt B. S., Pinto J. E., Pirie W. L. (2015), Fixed Income Analysis, John Wiley & Sons
- U.S. Government, (1974), The Code of Federal Regulations of the United States of America, Federal Register
Author: Agnieszka Krztoń
