The perfect complement to your off-plan purchase: the deposit bond
Hey Guys,
Often times there is a great deal of time between the exchange of a property and completion in the case of an Off the Plan purchase. So this can means that you have to commit your deposit for a long time. There are many reasons that you might not want to tie your money up for this. It’s these cases a Deposit Bond is a great solution.
Effectively the deposit bond is an alternative to a cash deposit.
So what is a Deposit Bond?
Basically, a deposit bond is an insurance policy, although not a insurance policy for you but for the developer. It’s a policy that tells the developer that the Deposit Bond company will pay the 5%, 10% even 15% deposit to the developer in any of the circumstances where the deposit would normally be forfeited by the developer.
No money actually changes hands between the developer and the bond company under the deposit bond unless a claim is made. Instead, the buyer will simply pay all the money over upon completion as you normally would. Upon legal completion the deposit bond simply lapses.
What does a Deposit Bond cost?
The cost of a deposit bond will vary depending on the value of the bond required and the time that it is required. The larger the deposit bond required the more expensive and the longer the bond is required the more expensive. I generally work on 1% of the property price for a 10% deposit over a 24 month bond. This is simply a rule of thumb and will depend on the bond company the developer (or YPC) use.
What are the risks with using a Deposit Bond?
The biggest risk is that the buyer of the property is still legally bound to complete as if they had paid cash instead of a bond. So if you are going to use a bond you must be ready to front up with the cash upon completion. In the case that the buyer doesn’t complete on the property and the developer exercises their rights under the terms of the contract and rescinds, they can then claim under the bond. Once this happens the bond company which has paid the developer will go about claiming the deposit and costs back from you.
Does a vendor have to accept a deposit bond?
I have used deposit bonds quite often in Australia with great success but we have to make sure that the developer (and their funders) are happy to accept them. I have seen deposit bonds cause a great deal of trouble where their use has been unexpected. This is because a deposit bond is often not recognised as a true deposit.
In the UK deposit bonds are relatively new compared to Australia and a lot of developers have never heard of bonds. We have a list of over 40 developers that are aware of and happy to use deposit bonds. It’s these that are the most likely developers we will be working with over the coming months and years. We will also be working on getting the word out to more developers.
Where a contract of sale states that a deposit is to be paid, the deposit must actually be paid with cash. The deposit bond is really no more than an insurance policy, issued on the basis that the full purchase price will be paid at completion, and therefore no cash is available for the developer to use to build the property, buy further property or as cash flow in their business.
So if the developer needs the cash then generally they won’t accept a deposit bond.
Who can use a Deposit Bond used for?
The most common use of deposit bonds are where: people are buying off plan, people waiting for funds to come through from another source, people with equity in their existing portfolio but not enough liquid assets, people intending to bid at auctions.
What types of Deposit Bond are available?
Even though there is only one type of bond, depending on the time between exchange and completion it will change the level of detail required to gain approval of the bond.
You will hear a lot more about deposit bonds over the next 4-5 years in property. YPC has not sold off plan for some time as it was the wrong time to sell it but the time has come to incorporate this new strategy. The market is ripe and massive returns are available to those that take advantage.
Live with passion,
Brett Alegre-Wood
PS. I did a quick calculation of how much less I am paying on mortgages this week and needless to say it has made a massive difference to my cash flow. In the thousands of pounds each month in fact, even so I am still maintaining my Mortgage Cost Averaging at 6%.
