What is a Real Estate Broker Bond?
Real estate broker bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating real estate sales in the broker’s jurisdiction as a condition of licensure for most real estate brokers or salespersons. Real estate brokers serve as an intermediary between buying and selling parties in real estate transactions.
Real estate broker bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a real estate broker bond, will also be referred to as the “surety company” or the “bond company”. Real estate broker bonds refer to the broker as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Real Estate Broker Bond required?
Real estate brokers are required to purchase license bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a broker breaking the statutes and regulations imposed on real estate brokers. The surety company provides the government a guarantee (the surety bond) that the buyers and sellers in a real estate transaction with abroker will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the real estate broker’s license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, real estate brokers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension.
Real estate broker bond violations triggering a bond payout may include a broker mishandling a buyer’s assets, failing to disclose accurate property conditions, committing mortgage fraud, and acting as a broker without the proper licensing.
How much does a Real Estate Broker Bond cost?
Real estate broker bonds generally cost between .5% and 1% of the bond limit.
Example: $10,000 Real Estate Broker Bond Cost
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The actual cost of a specific real estate broker bond can vary depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the real estate broker’s license history and experience.
Is a Credit Check Required for Real Estate Broker Bonds?
Credit checks are not required for real estate broker bonds.
How does the wording in the bond form impact the cost of a Real Estate Broker Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and real estate broker (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the broker via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a real estate broker bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 real estate broker bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Real estate broker 32bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the real estate broker and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the real estate broker failing to pay premiums due or claim payouts. Real estate broker bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Real estate broker bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.