In this video we explain what you need to know about DEPOSIT BONDS in QLD property. We explain the who, what where when & why. This applies to QLD Property (Real Estate).
This video/blog is great for - QLD property owners, real estate agents & mortgage brokers who want to be able to confidently explain and understand Deposit Bonds & QLD property.
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Hi everybody - George Sourris, Empire Legal.
Today's topic: Deposit Bonds in QLD.
Deposit Bonds are an area of property law that are often danced around due to a knowledge gap. Let's jump right into everything you need to know. In Queensland, a standard contract of sale obliges the deposit to be a cash deposit. The deposit is there in the event that the purchaser defaults on the contract and may be forfeitable to the vendor.
Usually, the higher the deposit, the more attractive the offer for a vendor. The maximum amount allowed is 10% of the purchase price, otherwise the contract can become an instalment contract, which is NOT attractive to most buyers and sellers, and is often avoided. The deposit is held in the trust account of either: the real estate agent or by one of the law firms representing the purchaser or vendor.
However, instead of a cash deposit, a purchaser may request to use a deposit bond as security. A deposit bond is a guarantee from an insurer or financial institution that a buyer can use instead of a cash deposit. The deposit bond's purpose is to provide security until settlement, when the vendor will receive the entire purchase price as cash. A deposit bond will attract a fee, payable by the purchaser.
In the event the bond is called upon, the insurer or financial institution will pay out the monies, and then they will pursue the purchaser to recover the funds.
When would someone typically use a deposit bond?
1 -cash poor purchasers;
2 - purchasers who need to sell their property first to buy and have no cash as it's tied up in their property;
3 - borrowing funds to purchase with the assistance of a guarantor; or
4 - purchasers who don't want to tie up their cash.
How does a deposit bond work?
Put simply, a deposit bond acts as a guaranteed IOU for the deposit. It is a substitute for a cash deposit. All going to plan, a deposit bond is surrendered at settlement and the full purchase price of the property is paid as a part of the settlement process.
How long does a deposit bond last in Queensland?
In Queensland, most deposit bonds will expire in a period as soon as 3 months, and as long as 4 years.
How do I get a deposit bond?
A purchaser needs to apply and get approval from an insurer or financial institution. Imagine it's a similar process to applying for a credit card. There is a process to determine the eligibility.
Typically, a purchaser will pay 1.2 to 1.5 % of the total deposit price. You can likely find a deposit bond calculator online through the lender that you may engage. We suggest you compare products to determine the fees and even compare against alternative solutions. For example, a personal loan might be a better solution for you or offer a more competitive rate.
It is also advisable to understand if the deposit bond fee is fully or partially refundable in the event the purchase does not go ahead.
How long does it take to get a deposit bond?
This varies from company to company, however, it is not uncommon to receive a deposit bond anywhere between one business hour to 48 hours.
What do I need to get a deposit bond?
You will likely need to provide: ID, a contract of sale, finance approval from your bank and proof of income.
Deposit Bond Risks.
In real estate, cash is king. Rarely is anything more attractive than cash as security for a vendor. If a deposit bond is a higher amount, it may be attractive to a vendor.
However, the vendor is relying on the insurer or financial institution to pay out in the event of a buyer's default. Whilst often the deposit bonds come from a reputable company and are a "guarantee", a vendor will need to request the funds to cash in the bond with the insurer. In contrast, a cash deposit is sitting in trust as cash.
Another risk is the purchaser hurting their credit score in the event they have declined a deposit bond. Furthermore, a vendor or selling agent may not accept a deposit bond. A vendor is not obliged to agree to accepting a deposit bond.
A prospective buyer should talk to the selling agent to see if the vendor will agree to a deposit bond. Note, if a deposit bond is to be used for a purchase, a special condition needs to be added to the contract.
That's critical guys, so agents - please contact us if you need this clause. We are more than happy to assist.
Thanks everybody.
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George Sourris. Empire Legal.
If you have any questions, you can email me: george@empirelegal.com.au.
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Ladies and gentlemen, please keep in mind that all advice is general in nature and does not constitute legal advice. This is authorised by George Sourris, Empire Legal, Gold Coast, Queensland, Australia.
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Note: all information is general in nature and as each matter is unique please contact our office for tailored advices: the above does not constitute legal advice.