Deposit Bonds – Best To Ask First!

If you’re considering the use of a deposit bond, be sure to allow for it in your contract.

A growing number of purchasers are landing themselves in strife because they believe that a deposit bond is as good as cash. Furthermore, they believe that a deposit bond can be used as a substitute for a cash deposit.

Most real estate contracts require the payment of a deposit, usually 10%. This amount is usually specified as a monetary figure. This means that the purchaser MUST pay the deposit in form of money, by way of a cash payment or a cheque or funds transfer.

But a deposit bond is not money. It is no more than an insurance policy that states that the insurer will pay the vendor an amount equal to the 10% deposit upon the happening of a certain event – usually some form of default on the part of the purchaser. If the matter proceeds to settlement, then all of the purchase moneys are paid at settlement, and no claim is made against the deposit bond.

The fact that the deposit bond is not money is what causes problems. Unless the contract allows for the use of a deposit bond, the vendor is entitled to demand payment of the deposit by way of a cash payment. This can result in hardship for the purchaser, but can also result in a breach of the contract, with dire consequences for the defaulting purchaser.

How to stay safe? Have provision made in the contract for payment of the deposit by way of a deposit bond. By seeking the vendor’s approval you will avoid problems later. But beware! Estate agents don’t like deposit bonds, because they cannot secure their commission. Some estate agents will even require the vendor to insert a special condition into the contract, expressly excluding payment of the deposit by way of deposit bond!