What Are Deposit Bonds and When Are They Useful?

[youtube id="qYFuIRDJPIc" align="left" mode="lazyload" maxwidth="500"] When investing in property a deposit is paid upon the contract going unconditional. If your money is tied up elsewhere a deposit bond can be used in it's place. Sometimes, when you're purchasing an investment property, you may not have the cash that you need for the deposit right there and then. Often, when you purchase, you're putting 5%, 10% of the deposit down. And for those people who have their cash tied elsewhere or may need their cash for other things, there is something called a "deposit bond" that you can use to put down as, I guess, a replacement for the deposit and you'll then pay it in future. To understand more about this, I have Etienne on with me today from Deposit Assure. He supplies people with deposit bonds. He's the expert in this, so we're going to talk today about what exactly deposit bonds are and what sort of people and situations they're useful in. Ryan: Hey, Etienne, thanks for coming on today. Etienne: Hey, Ryan. Thanks, mate, I'm really stoked to be on here. I'm a big supporter of your podcast, so really looking forward to this one. Ryan: Yeah. Well, we appreciate you coming on and getting your knowledge as well. Do you want to just quickly introduce yourself and then just answer people, what exactly is a deposit bond? Etienne: Sure, okay. My name is Etienne Rizzo. I'm one of the co-founders of Deposit Assure. We're a business that's been set up about a year and half ago now. We're backed by QBE Insurance, which basically means that our deposit bonds are underwritten by QBE, which is effectively the strongest underwriter in our current market in Australia. They're an A+ credit rated agency. To answer your question, Ryan, what is a deposit bond? If your audience goes back to the last time they bought a property, they would have had to provide the real estate agent and their vendor a 10% deposit. So, up to 10% of the purchase price to basically affirm their commitment to their unconditional contract of sale. Sometimes, it can be 5% as well, but effectively, like a cash deposit, what it does is it just basically gives the vendor some assurance that the sale is going to go through. For some people who either don't have ready access to that cash, so you could be basically a first time buyer, for example, who's borrowing 100% of the purchase price and don't have the funds you need of the 10% to secure the property, you could use a deposit bond. Or, a property investor who is buying their first investment property. Now that you've built some equity in your home, your money is working for you and your offset account, you don't want to use it to secure the property. You could apply for a deposit bond in that situation as well. The third, probably, scenario, Ryan, is buying and selling, which we see a lot of. So when somebody's selling their property and the funds from that property is being used to fund the property they're buying, they are waiting for the funds to arrive on settlement. So they don't have access today to that cash to secure the property they're buying. So those are, I guess, the main scenarios we see with deposit bonds. Ryan: Yeah. And we'll talk a little bit more about them. Because I know people are probably familiar with the bridging finance when you buy and sell, but then, they don't often think about, okay, well, I actually have to pay 10% of the deposit 6 weeks or 4 weeks or however long it is before you actually settle and get that property. I need to come up with this large amount of money that not everyone has at that point in time. So deposit bond is one way to get that. What do you mean it's backed by QBE? How exactly do they work? So we put down a deposit bond, which is kind of like, is it an I.O.U.? Is that effectively what it is? Like, you're saying to the real estate agent, "I owe you the 10% deposit?” Etienne: Yeah, that's right. So, to answer your question, when we assess the client's ability to receive a deposit bond, we have to make sure we are comfortable. And when we say, "we", ourselves and our underwriter, QBE, that they will be able to settle on the day. So we don't just give deposit bonds to anyone. There's some strict criteria that we go through. And that's the most important thing. So QBE Insurance, they are obviously, they have a bonds division and, basically, they guarantee the person – the purchaser – for that particular deposit bond. What happens is, it's basically the substitute for the deposit required from signing their contract to settlement. So if there's a claim on the bond within that period, ourselves and our underwriter, QBE, will pay the vendor that cash deposit within 48 hours. From that point in time, we will then retrieve those funds from the purchaser themselves. So, it's not a get-out-of-jail card and that's why it's an insurance and that's why we pay a fee and that's where the cost comes down for QBE to underwrite this product. Ryan: Yeah. So, I think, it's for people who don't have the cash right now, but will have the cash and be able to pay it at a later date. It's not like some magical way of not paying a deposit or something like that. And so, I do get the feeling it is like an I.O.U. card, but it's an I.O.U. card backed by QBE Insurance. And so, if I was to put down a deposit bond and say, "Yeah, I'm going to buy this house." and then I disappear to another country or something like that. Then, they can go to QBE and say, "Hey, Ryan's disappeared. Can we have our deposit?" and QBE will say, "Yup. Here's your money." And then, they'll try and find me in whatever place I've disappeared to. Yeah? Etienne: You're exactly right. You know, the strength of QBE really assists us because they are many for off the plan. There are many developers like Mirvac and Caydon that only accept deposit bonds by QBE. So it's just in this current climate that we're in, it just gives an additional weight, I guess, that our deposit bonds are strong and they will be honored. Ryan: Yeah. So that's something that I wanted to ask. How accepting are people of deposit bonds? I know most people, when selling their house, they're expecting to get a deposit. I imagine you talk to people, they don't really understand what deposit bonds are. So, how accepting are sellers of deposit bonds in the current market? Etienne: Okay. It's a very good question. The reason why – there are a couple of deposit bond players in the market and the reason why deposit assures the new entrant and why we've decided to come into this market is that there are still such a lack of understanding and awareness about what they are. Now, when I say that, I mean, within the business space, as well. So brokers, conveyancers, solicitors, banks as well as, property investors and consumers. So, what we always say is, you do have to get approval from the real estate agent and their vendor to accept deposit bonds. And we do find that a lot of people still, to this day, don't know what they are. And one of the biggest challenges that we face, if you were to look at our SWOT analysis that we've done, is this low awareness. Especially banks, I think right off the plane, a lot banks, the major banks, don't accept deposit bonds sales as part of their pre-sales. So that's a challenge that we are facing and we're trying to address. But, what we have is an education program with webinars and marketing materials that target the different stakeholders as well as consumers that try and educate what they are and the value that they provide. Because we do feel that they are underrated in this market and we do believe that they have a place in this market just like bank guarantees do, just like bridging loans do. They're just another option in a toolkit of your mortgage broker or your conveyancer or in your own hands as a property purchaser. Ryan: Yeah. So if I'm expecting to use a deposit bond, I kind of need to be expecting that I'm going to have to sort of educate the real estate agent or educate the seller what exactly this is and how they are actually getting security in order for them to accept that. Etienne: Okay. Look, I'll answer that with probably in 10 inquiries that we have about deposit bonds, I would say that 70% of the time the vendor or real estate agent have heard of it or know about it. And the other time, we need to have a phone call on behalf of the client to sort of run them through what it is, explain the QBE backing and assure them, either by email or over the phone, about how the process works. That's part of our proposition to help any investors in your audience or anyone else about deposit bonds. There is a little bit of explanation that may need to happen at this point in time, but we're expecting over the next 2 or 3 years, as our marketing plan rolls out, that that's going to be less and less frequent. Ryan: Yup, okay, cool. Let's talk about – we'll go into the situations of when these deposit bonds are useful. One of the things that we talked about before this was people who are looking to invest, but have their cash tied elsewhere. Maybe they've just found this awesome property that they want to get signed or whatever, but they haven't gone through the process of getting access to the equity they have or something like that. And so, they need to put something down and so, maybe they put a deposit bond down or there might be other situations like if someone's getting family guarantor and they're getting 100% of the loan or 100% plus fees, which I have seen some people do. They still have to come up with the deposit and sometimes people don't have the money for the deposit. That's why they're going with the family guarantor in the first place. And so,