A banker’s guarantee (BG) is a promise from a bank that specified funds are available and ready to be disbursed to the beneficiary within a specified period should certain conditions be met.
It can take the form of a hardcopy document or a digital SWIFT message.
There are basically two types of BGs:
- Financial guarantee
- Performance guarantee
When BGs are used in real estate, it is usually a performance guarantee.
Bankers guarantees usually have no involvement in regular residential real estate purchases or refinancing.
But they can sometimes play a role in commercial and industrial property financing.
A proper banker’s guarantee would include key information like:
- Active period and expiry date
- Claim period
- Express maximum liability limit
- Requirements for payment on demand
- Terms of assignment (if any)
In terms of the property market, BGs are most often used in the financing of major construction projects.
For example, when a land owner wants a developer to provide a BG to protect himself against completion failure or the developer going bust.
Either that, or the bankers guarantee can be substituted with an insurance performance bond or cashier’s order.
Other common types of BGs used in real estate include the bid bond and warranty bond.
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