Big news in real estate and how it impacts you

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The country’s primary provider of real estate deposit bonds, Deposit Power, no longer has a guarantor/underwriter.

CBL Insurance, Deposit Power’s existing guarantor, is reported to have been placed into interim liquidation in a move aimed at protecting existing policy holders, with the extent of the insurer’s woes unknown at this time.

Deposit Power have indicated via their website that they are “currently experiencing issues which we are currently working on and as a result are unable to accept, process or issue new applications on behalf of CBL Insurance Limited”.

A deposit bond is essentially an insurance policy taken out by the purchaser of real estate and provided to a seller used as an alternative to a traditional cash deposit. The law says that if a purchaser does not fulfil its obligations to pay the purchase price to a seller under the terms of a contract then the purchaser forfeits their 10 per cent deposit to the seller.

Where a purchaser has used a deposit bond instead of cash, the seller can call upon the bond and the bond provider will pay the 10 per cent deposit to the seller and then pursue the purchaser to recover the money.

While the most common form of payment for a deposit in a real estate transaction is cash, deposit bonds are used in a substantial number of transactions.

In general terms, the risk to buyers and sellers is relatively low because a typical real estate transaction is over in six weeks. Provided that a buyer complies with its obligations under a contract and pays the purchase price to the seller the bond is never called upon and simply fades into the ether once the transaction is completed.

The implications this news may have on the market moving forward could be significant however, for example:

1. Sellers do not have to accept deposit bonds as payment of a deposit. While many do, if this deposit bond drama is not resolved quickly, sellers may be much more reluctant to accept bonds as a method of deposit payment in the future. This means that even if a lender is willing to lend a buyer over 90 per cent of the purchase price, buyers may still have to come up with the full 10 per cent deposit in real cash.

2. A lot of sale contracts contain provisions allowing for the deposit paid by a buyer to be released to a seller for the purpose of a seller’s subsequent purchase (usually people sell their homes to upgrade or downsize so often they need the deposit money to pay for their new purchase immediately). In the past, lawyers acting for buyers have sought to have these conditions removed on the basis that the seller can use a bond to pay their deposit on their subsequent purchase. This may no longer be a feasible solution.

As for what this means right now for buyers and sellers involved in transactions with deposit bonds, it is unclear.

It has been reported that the most likely outcome is that Deposit Power and/or its policies will be guaranteed/underwritten by a new insurer and the world of real estate transactions will carry on largely unaffected. There is unlikely any need for panic.

If you are concerned, contact your lawyer or conveyancer to discuss.

Nothing in the above article should be construed as legal advice. The comments made by the writer are general in nature and for information purposes only.

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