The purchase of real estate is classified as a high-risk transaction, therefore, the seller may require the transaction to be made only using a letter of credit. This is understandable, since calculations using such a system are the most reliable option for both parties. That is why it is necessary to consider in detail not only what it is, but also how it works in reality.
Real estate transactions
If we consider this type of interaction in the most simplified form, then the buyer buys the object, pays money for it, and the seller sells it at the price at which an agreement was reached, and receives the money. Everything is quite simple here, but there are certain nuances.
It is important to understand that the purchase and sale transaction will be recognized as completed only in case of successful registration of the purchase and sale agreement in the respective registration structures. Such a situation is quite real when the contract is signed, and even referred by the buyer to the registration authorities, but then the seller changed his mind about selling his property. He goes to Rosreestr to pick up a statement of intent to sell the property.
In such cases, a problem arises, especially if at that moment the money has already been transferred to the seller. To return them you will need to go to court, which is a rather lengthy and costly affair. Here we get a situation where you can’t pay right away, but don’t give money either, because the seller will not have a guarantee that the buyer will give the money after registration. In this case, for both parties there is a great risk of being left without money or without an apartment.
general characteristics
A letter of credit is one of the modern forms of payment in a non - cash way, used for interaction between the seller and the buyer. In fact, it is a guarantee of the security and legality of any transaction. For individuals, a letter of credit when buying real estate has such an indisputable advantage as all non-cash transactions: this is the absence of the need for a large amount of money on hand, as well as concern for their transportation. When issuing a letter of credit, the buyer authorizes the bank to transfer a certain amount of money to the seller’s account after he fulfills and confirms certain obligations under the agreement.
Practical use
If we talk about how to apply a letter of credit when buying a property, then there are certain features. The calculation scheme in this case looks like a certain way. An agreement is drawn up between the buyer and seller that this form will be used for mutual settlements under the transaction. The letter of credit agreement contains all the information about which terms of payment and methods of notification of the parties will be used, as well as details of the participants in the transaction.
The buyer must contact the bank that serves him to issue a letter of credit there. A special account is also opened at the seller’s service bank. The buyer’s bank will transfer funds to it from the account of his client. It turns out that the funds on the seller’s letter of credit are usually located even before the transaction is started. This is the essence of security for both sides.
How to get funds
Cash for the seller will become available only when the purchase and sale transaction is completed, and all the documents necessary for its confirmation will be provided to the bank. If there is no doubt about their legality, correctness and reliability, then the seller’s bank will debit the funds from the letter of credit to the client’s account.
Documentary confirmation required
This type of transaction, such as the purchase of real estate, involves the provision of a contract of sale of a house or apartment, which has passed the state registration procedure. Some banks request extracts from the unified state register of rights that confirm the buyer's ownership of the purchased property. When finding seller and buyer accounts in the same bank, the scheme becomes much simpler.
Benefits of a Letter of Credit
If you use a letter of credit when buying real estate, then there is a whole range of advantages for both parties to the transaction. For the seller, this will be a guarantee of receiving funds in full from the buyer. The money will be in the buyer’s letter of credit at the time of the transaction, so he will be sure of their safety. The bank guarantees payment if the seller submits all the required documents and complies with the terms of the letter of credit.
The buyer can rely on a full guarantee of the transaction: if for some reason the transaction does not take place, then the refund will be made in full. If the seller fails to fulfill at least one condition of the letter of credit, then the payment by the bank will not be made.
Buying a property using a letter of credit allows you to not make an advance payment or pay for the transaction in installments.
Non-cash way of interaction is safe and convenient.
Compliance with the terms of the contract is closely monitored by third parties, that is, bankers. If you use a letter of credit when buying real estate, then not only participants in the transaction are interested in the correctness and legality of its execution. Credit organizations in this case are also liable in accordance with applicable law. In this case, it is guaranteed that the executing bank will not accept fake or incomplete documents for the transaction for payment. When a credit person acts as a guarantor of a transaction, that is, a letter of credit is used to buy real estate, this is always a sign of reliability.
Disadvantages of a letter of credit
Despite the fact that this form of settlements has a whole range of positive aspects, there are certain drawbacks. The document flow is quite complicated, since at each stage of the transaction requires careful monitoring. Drawing up a letter of credit agreement and conducting operations on it is usually accompanied by the need to pay a commission. Usually its amount depends on the amount of the transaction.
Why not used
Few people use a letter of credit when buying real estate. Sberbank has long been offering its customers to use such a secure service. This form of mutual settlement is often compared using bank cells, but it is used much less frequently. The methods have similarities, but there are strong differences. The use of the cell assumes the availability of money in physical manifestation, and for the second case, it is cashless payments, and this is the letter of credit. Sberbank provides both options, but most often customers stop at the first of them.
This is due to many points. A customer deposits funds to a bank cell secretly, that is, he does not disclose to the bank its contents. In this case, the seller cannot be sure of the honesty of the buyer. And in this case, the bank does not bear any responsibility, even if a sales contract has already been concluded. The letter of credit in this case protects both parties, as the credit institution is responsible for any violations during the execution of the transaction.
Conclusion
The use of accredited forms of payment when buying real estate is recognized by experts as a good option. Banks are interested in the success of the transaction, so they will carefully monitor it at every stage.