What is a letter of credit in real estate transactions

Today, many real estate transactions are accompanied by a letter of credit. What is this method of mutual settlement and what are its types?

Letter of credit: what is that?

When conducting real estate transactions, this concept means a method of non-cash payment in accordance with the contract that is concluded before the purchase of the object. As a result, the seller will be able to receive money only after he fully fulfills the conditions specified in it. The funds are kept in a special bank account (letter of credit) until this time.

The buyer of real estate in the framework of this method of calculation instructs the banking institution to perform an operation to transfer money to the seller, thereby protecting himself from fraud.

To receive funds, the former homeowner must provide documents confirming the fulfillment of all contractual obligations.

You can use a letter of credit when conducting real estate transactions on both the primary and secondary markets. This method of non-cash payment is popular not only among developers and banks that practice mortgage lending, but also ordinary buyers who purchase real estate for personal funds.

What types are there

There are several types of bank letters of credit used in real estate transactions: irrevocable (changes or cancellations are possible only after obtaining permission from the seller (recipient of funds)); revocable (not suitable for real estate transactions, since the seller's consent is not required to make changes or cancel); covered (money is immediately transferred to the seller's bank); uncovered (funds are transferred as a result of their gradual write-off according to the procedure defined by the preliminary agreement between the banks); acceptance or non-acceptance (there is or there is no requirement to provide additional consent/acceptance of the buyer before making a transfer of funds to the seller after fulfilling all obligations on his part).

Advantages of using

The use of a letter of credit has the following advantages: the buyer is guaranteed to pay the entire amount to the seller; the bank will monitor compliance with all the points specified in the agreement; if the purchase is canceled for any reason, the money will be returned to the buyer in full.

In addition, the first stage of the transaction occurs quickly (often the presence of the seller is not a prerequisite).