Depository bond

Depository bond
See also

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

  1. Marston R. C. (2014), pg. 115 – 117
  2. Petitt B. S., Pinto J. E., Pirie W. L. (2015), pg. 105
  3. Petitt B. S., Pinto J. E., Pirie W. L. (2015), pg. 80-82
  4. General Assembly in Illinois (2006), pg. 3651 – 3652
  5. Petitt B. S., Pinto J. E., Pirie W. L. (2015), pg. 15 - 16

References

Author: Agnieszka Krztoń