Accounting & Finance
Surety Bonds for Real Estate and Construction
If you are a business owner, there are many important factors to consider if you want your business to grow and succeed.
When it comes to real estate and construction, the industry is quite dynamic. Many decision-makers can get lost in all the needed paperwork and logistics.
One of those essential things you must get is a surety bond — a guarantee that you will deliver results and maintain the industry’s regulations.
However, many types of surety bonds are out there, so it is no wonder people often don’t grant them much importance.
In this property article, we look at the following:
- Types of surety bonds
- How real estate and construction use surety bonds
Let’s first make sure you know what surety bonds are and their role in financing.
What Are Surety Bonds?
A surety bond is a financial guarantee designed to protect your customers, suppliers, subcontractors, and government regulators.
By getting a surety bond for your business, you guarantee that you will fulfill any contractual obligations, government regulations, and industry standards that apply to a project.
When it comes to real estate and construction, surety bonds are usually required to participate in public tenders. In addition, many private customers also insist on working only with bonded contractors.
Surety bonds are three-party contracts, with the bonded business as the principal.
The party receiving the guarantee is the obligee — it can be an end customer, a subcontractor, a state agency, etc.
Neutral guarantors issue surety bonds called surety companies. These specialized divisions of insurance companies agree to reimburse the obligee if the principal violates the bond terms.
Surety Bonds in Real Estate and Construction
There are many different types of surety bonds on the market. Depending on the nature of your business, you might have to get more than one type to be regarded as fully bonded.
When it comes to real estate and construction, there are two categories to consider:
- Real estate broker bonds
- Construction (contractor) bonds
If your business deals in real estate or construction, you need to know the types of bonds.
Brand Reputation, New Customers
Aside from the protection surety bonds offer to your customers and subcontractors, surety bonds are also crucial for protecting your brand reputation and acquiring new customers.
As we already mentioned, not having a surety bond will prevent you from getting new business from public bids or private customers. If you are a more recent company that struggles to gain momentum, acquiring a surety bond will increase your chances of gaining customers.
Types of Surety Bonds
Let’s look at the different types of real estate and construction bonds, their specifics, and the benefits they offer.
Real Estate Broker Bonds
Real estate broker surety bonds guarantee that all properties and funds processed through a bonded agent or broker for a real estate transaction will be handled properly.
These bonds also ensure that the broker will comply with all state regulations for their license. For that reason, surety bonds are usually part of the screening process for acquiring a real estate broker license.
Surety bonds for real estate brokers are designed to protect those using the broker’s services and the state that issued their licenses.
For example, if a broker commits fraud or breaks industry regulations, an obligee may file a claim against their bond and be reimbursed by the surety company. Keep in mind that the broker must fully reimburse the surety for the sum they have paid to the obligee.
Generally, there is only one type of real estate broker bond. However, states like Oregon require a separate bond if you are dealing with manufactured structures. If you want to acquire such a bond, check the requirements for your state.
Construction bonds are commonly known as contractor/contract bonds and are generally required for any industry company.
These bonds guarantee that your company will comply with all contractual obligations and legal requirements for a construction project.
There are various construction bond types available, each covering a particular stage of the work on the project.
Let’s look at some of the common types of construction surety bonds that you will need to obtain.
A bid bond guarantees that you will execute the project at the price you offered at the bidding stage—usually a requirement for all public tenders and bids.
Use a payment bond to guarantee that you will pay any suppliers, temp workers, and subcontractors involved in the project.
This bond guarantees your client that you will strictly adhere to all contract requirements, terms, and conditions.
Remember that payment and performance bonds are often grouped since they are closely related.
You can see how important the maintenance bond is when it ensures there will be no faults with the project within a certain period after completion.
Did you know this bond is also known as a warranty bond and guarantee the quality of labor and materials used for the project?
A lack of supplies can hold up a construction project; hence the supply bond ensures that you will provide any supplies or materials as per the contract for the project.
The supply bond is usually a requirement for public tenders.
If your business operates in the real estate and construction industry, you must obtain surety bonds to be competitive and acquire new business. Those bonds will also protect you and your customers, creating a better value proposition for your company.
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