Surety Bonds for Real Estate Brokers

Perspective homeowners know understanding homeownership lingo can be an all-consuming job in itself. Buyers have to navigate through terms such as FHA, escrow and adjustable rate mortgages, on top of finding their dream home. While many choose to lead the effort on their own, some prefer to have professional guidance through a mortgage broker. However, some are hesitant to rely on an outside individual for such a critical financial investment. In the wake of several high-profile investment scandals, many are simply too scared to trust their finances in the hands of others.

Fortunately, government regulations are on the side of smart consumers. By applying what you know about surety bonds in the real estate industry, you can find your dream home and know your assets are secure.

An Overview of Surety Bonds

In many industries, government agencies help protect consumers by mandating the purchase of surety bonds by certain professionals – namely, those who have access to others’ finances and property. A surety bond provides consumers with compensation in case of a professional’s misconduct.

For example, to keep his or her license, a building contractor must purchase a surety bond. This provides consumers with protection in case the contractor should skip town with their cash or otherwise fail to meet professional guidelines. If the contractor doesn’t make good on promises, then their surety bond company will help rectify matters for customers.

Similarly, brokers and others in the financial industry are required to buy protective surety bonds in order to remain licensed.

How Surety Bonds Work

Surety bonds are a contractual agreement between three parties: a surety, a principal (the person acquiring the bond) and an obligee, the entity that is requiring the bond; in this instance, it’s the government. Although surety bonds are often confused with insurance policies, they serve different purposes. Insurance policies are purchased under the assumption something may go wrong, and protection will be needed. Surety bonds are more of a preventative measurement, which help encourage principals to make appropriate, professional decisions. Ultimately, the principal will be responsible to repay any damages should a claim be filed against them; therefore it is in their best interest to act ethically.

Also, surety agencies will not provide bonds for individuals or companies they feel are at high risk. Detailed investigations are performed regarding a company’s past history, their financial history and whether they have applied for bonding prior to selling a bond to organizations. Typically, surety agencies avoid putting themselves at risk by working exclusively with financially-sound clients.

Choose a Bonded Financial Adviser

Bonds are required for a variety of financial advisors: bankers, lenders, and real estate brokers are just a few professions required to hold surety bonds. Bonding requirements do vary by state, therefore individuals should research their local legislations prior to inquiring whether their financial advisor has obtained one.