Letter of credit when buying real estate: pros and cons

Banking and economic terminology is not familiar to everyone, and what a letter of credit is when buying a property, not all buyers know.

In the proposed article, we will try to understand the concept of "letter of credit", to determine its advantages and disadvantages. We will also talk about credit institutions offering this service.

Brief terminology

• Applicant - the applicant company for the opening of the letter of credit / payer under the contract.
• Beneficiary - the recipient of payment funds, acting as a third party.

Letter of credit concept

A “letter of credit” means one of the forms of monetary obligations upon the occurrence of which the recipient (beneficiary) has the right to receive funds at the request of a bank client, but only if he provides the credit institution with a payment executing a letter of credit when purchasing real estate. In this case, all conditions of the operation must be observed. In other words, a letter of credit – one of the types of safe settlement. When making a payment in this way, the banking institution acts as a guarantor of the operation.

What gives the commission of such an operation

Using a letter of credit, you have the opportunity to make any payments in favor of a third party, if the recipient contacts the bank and, having provided all the documents necessary for payment, requests the amount prescribed in the contract.

Important! Remember that when conducting such an operation, it is necessary to comply with the terms regulated by the clauses of the contract. If they expire, it will be impossible to receive payment even if all the necessary documents are available.

Using a letter of credit, you can redirect the payment, transferring authority to another bank to carry out the same operations, or accept, make payment and take into account a bill of exchange.

Using the service abroad

In foreign practice, a letter of credit or a cell when buying real estate in most cases is reassigned to finance a particular service or transaction, and the principle of payment is similar to operations with a bank guarantee. However, there are some differences between such operations. The letter of credit is intended for temporary freezing of cash or cashless payments under a contract. A cell is opened when there is a need to transfer funds to another recipient. The shelf life of money in the cell is slightly shorter. And one and the other storage method guarantees the reliability of your savings.

Letters of credit, carried out at the international level, issue, taking into account the unified system of rules adopted by the documentary system of letters of credit of the International Chamber of Commerce in 2007.

In the Russian Federation, the regulatory documents governing the process of implementing a letter of credit are approved by the Central Bank of Russia and in fact differ from the generally accepted practice in Europe.

Classification of letters of credit

In total, 11 types of assets are distinguished:

1. Revocable, which can be canceled at the request of the payer or the issuing bank.
2. Fail-safe - not cancelable.
3. With a red reservation. This group of operations includes letters of credit providing for the payment (advance) by an authorized implementing bank at the request of the issuing bank.
4. Deposited, or covered. Letters of credit of this type are popular in our region. Using this obligation, the issuing bank fully covers the amount of the letter of credit for the period of conclusion of the transaction, using credit funds or funds of the payer for this.
5. Guaranteed, or uncovered. Operations of this type provide for the possibility of debiting funds from the account within the framework specified in the contract.
6. Confirmed - those that guarantee that the executing bank will settle at the agreed amount, regardless of the moment the funds are received from the issuing bank.
7. Revolving letters of credit provide for an even or partial payment by several payments coming from the payer's account to the payee's account. Using this type of operation allows you to save money, since in general the amount of costs is reduced.
8. Circular. They allow the beneficiary to receive funds credited earlier than the agreed terms under the loan agreement through any correspondent bank from the banking structure, which undertakes to pay a letter of credit to the client.
9. Reserve. They suggest the presentation of various types of documents (except payment documents) to receive payments by the beneficiary.
10. Cumulative. They provide an opportunity to transfer the unspent percentage of a valid letter of credit to the amount of a new one opened in the same banking institution.
11. Non-cumulative. Manipulations related to operations of this type permit the return of unspent funds through the structure of the issuing bank to the payer's account.

The principle of the letter of credit in the Russian Federation

Consider the situation. The parties had to make a deal for the first time. Since they have no experience in concluding transactions with each other, they are afraid to make an advance payment.

In the event of such a situation, one of the parties - the buyer - may ask the issuing bank to open a letter of credit when purchasing real estate for the amount indicated in the contract to be concluded. Upon opening the cell for receiving funds, it is necessary to provide guarantee materials confirming the obligations to fulfill the concluded contract. The list of such documents includes a contract of sale, a package of documents on the delivery or shipment of goods and other securities confirming the terms of the transaction.

Letter of Credit Procedure

At the end of the transaction, the seller must provide the issuing bank with documents that guarantee the successful completion of the transaction, after which the banking institution makes the payment by paying the previously agreed letter of credit when purchasing real estate, following the instructions received from the executing bank. Upon completion of all stages of the transaction and payment of the commission, the party acting as the recipient may withdraw funds in the amount specified in the contract.

Pluses of a letter of credit

The advantages of such an operation include:

1. Settlement by letter of credit when buying real estate avoids checking the authenticity of banknotes.
2. High level of reliability.
3. The banking institution is interested in the correctness of the transaction, because it strictly controls the process of the transaction.
4. Buying a property through a letter of credit reduces the risks for the parties to zero. Since only the bank has access to the frozen amount, it means that the possibility of losing funds is excluded.
5. The seller receives a 100% guarantee of receipt of proceeds from the transaction.
6. A letter of credit when buying real estate, the value of which rarely exceeds the amount of the commission for recalculating and renting a bank cell, is a service beneficial for both parties.

Disadvantages of a letter of credit

There are also some disadvantages of such an operation as a letter of credit:

1. A letter of credit transaction involves a complicated circulation of documents, a thorough check and strict control over the progress of the operation.
2. Transactions of this type are slower.
3. One of the significant disadvantages is the possibility of receiving funds only by one buyer, which complicates the course of the transaction if the property is owned by several persons.
4. By providing a letter of credit when buying real estate, Sberbank of Russia charges an additional commission.
5. In the event of a transaction failure, the return of the amount occurs in a judicial proceeding.
6. When making a letter of credit transaction, the bank puts forward a request to inform the tax service about the conclusion of the transaction.
7. Due to the complexity of the multi-stage process, high control and the time spent by a team of specialists, bank fees for such services are often overpriced.

Banks of the Russian Federation providing letters of credit to customers

Today, most large banks offer to conduct transactions through a letter of credit when buying real estate. These banks include:

• CBR
• Sberbank of Russia.
• Binbank.
• UniCredit Bank.
• Alfa Bank.

The main differences between the provision of services from leading banking institutions: the price of services, commission for operations and the speed of their implementation.

Parties to the transaction can choose any banking institution to conduct a guaranteed reliable transaction.

Tariff system for letters of credit transactions with Sberbank

It is best to complete the transaction through a letter of credit when buying a property. Sberbank sets the cost of the service in accordance with the current payment rate. The commission is calculated taking into account the amount of the transaction, the borrowed resources used and the period of safe retention of funds. Tariffs for services:

1. The amount of the commission for a letter of credit, implying the conduct of banking operations within one territorial division of the bank, is 0.2%. The upper and lower limits of the price are limited to 1000 and 5000 rubles, respectively.
2. Interacting with various structural divisions of banks - 0.3%. The upper and lower limits are 1,500 and 10,000 rubles.
3. The cost of services for servicing a letter of credit is 2000 rubles with a maximum period of interaction limited to 120 days.
4. The possibility of extending the shelf life of money in a cell + 60 days subject to an additional payment of 2,000 rubles.

Cost for legal entities and individuals

It is easy to note that the tariffs for services for the provision of a letter of credit operation for individuals are quite acceptable. By entering into transactions such as the purchase and sale of an apartment or house, you receive a guarantee of the reliability of the transaction and the fulfillment by the parties of their duties.

Letter of credit for legal entities is slightly more expensive than for individuals. The commission is higher - from 0.5% for the amount within 2500-10 000 rubles.

There is one condition that can reduce the cost of the tariff. If the bank takes part in a municipal or regional program of socially important importance, then the cost of services is formed individually or may be absent altogether.

When carrying out such an operation as a letter of credit, you have to document it. At the same time, a service agreement is concluded. The service itself is executed on a form established by the bank form, which indicates all data on the transaction. Letter of credit agreement for the purchase of real estate (sample) is presented in the photo below.

In any case, a letter of credit is a favorable condition for conducting a major transaction. Carrying out such an operation, you can not worry that the transaction will be dishonest or you will be deceived. In cooperation with the bank through the letter of credit agreement, all stages of the transaction are clear and transparent, and in this case there is nothing to worry about.

A letter of credit is your benefit and security during the execution of any transaction. Not many Russian banks offer such a service. But those who do this do their job efficiently, taking into account all the details of the operation, so that in the end you can get what you paid for, and the seller - honestly earned money from the sale.