Deposit Bonds can be quite useful when buying Property. When you exchange on a Contract of Sale to Purchase property, you will usually be required to make payment of a Deposit, usually in cash, which is 10% of the purchase price.
There are circumstances where this can be tricky though. Maybe your assets are invested and you require some time to access them or perhaps your bank is issuing you a loan which will cover 100% of the purchase price, but your loan funds are not available until settlement.
So, what do you do in these situations? The Vendor will still require payment of the Deposit before you enter the Contract.
Usually, a convenient way to address this situation is to have a Deposit Bond issued. A Deposit Bond is essentially a guarantee from a provider that they will make payment of the Deposit, if a purchaser defaults on the Contract. It is a promise to pay.
Some of the perks of Deposit Bonds are that there are multiple providers of Deposit Bonds in NSW, and they usually can be obtained fairly quickly. But there is usually an upfront fee associated with the issuing of a Deposit Bond.
Each provider will have specific criteria you will have to meet to become eligible for a Deposit Bond, which usually will be that you have an asset base in which they can secure the Bond against.
However, you cannot simply assume that a Bond will be accepted by the Vendor in your transaction. You will need to ensure that the Contract of Sale allows you to make payment of the Deposit by way of Bond.
The other big consideration is that the Deposit that you paid by way of using a Deposit Bond isn’t really paid. It is a promise to pay made by the provider. The amount that you are securing with a Bond will become payable at settlement of your transaction. So, the Bond is really only a temporary placeholder for the Deposit. You will still need to have the full amount payable, in cash, available at settlement.
If a Purchaser defaults on the Contract of Sale in which a Bond has been used in lieu of a cash Deposit, and the Vendor becomes entitled to retain the Deposit, the Vendor can then “cash in” the Bond with the provider. The Purchaser will remain liable to the provider to reimburse the amount of money owed to them.
This generally means that while there are a few extra hoops for the Vendor to jump through to collect a forfeited deposit, from the Vendor’s perspective accepting a Deposit Bond instead of a cash Deposit when you are selling, is relatively low risk.
If you have questions about Deposit Bonds, or purchasing property in general, contact Everingham Solomons because Helping You is Our Business.
Click here for more information on Sarah Rayner.