45. Everything you need to know about bank guarantees for property financing (Bankbürgschaft)

What is a bank guarantee (Bankbürgschaft)?

A Bankbürgschaft is a legally binding commitment issued by a financial institution (the bank), in which the bank undertakes to fulfil certain financial obligations on behalf of its customer (the buyer) if the customer is unable to meet his contractual payment duties.

In real estate transactions, this guarantee is frequently used to protect the seller or contractor against the risk of non-payment.

When is a bank guarantee used?

• Buying a property under construction:
  The property developer often requires a guarantee to secure the buyer’s ability to pay, especially when the purchase price is paid in instalments during different construction phases.

• Protecting advance payments:
  If the buyer pays a substantial deposit, a bank guarantee can protect this money in case the project fails or the developer becomes insolvent.

• Maintenance or repair obligations:
  The guarantee can also be used to secure the contractor’s obligations to remedy defects or carry out repairs during the warranty period.

Types of bank guarantees

1. Payment guarantee (Zahlungsbürgschaft)
   The bank guarantees payment of the agreed amounts if the buyer is no longer able to pay the instalments. This is the most common type of guarantee in real estate transactions.

2. Performance guarantee (Erfüllungsbürgschaft)
   Here, the bank guarantees that the contractor will fulfil the contract properly, in particular that the project will be completed according to the agreed specifications.

3. Defects guarantee (Mängelbürgschaft)
   This type of guarantee secures potential defect claims after handover and ensures that defects discovered within the warranty period can be remedied at the contractor’s expense.

How does a bank guarantee work?

1. Agreement with the bank
   The buyer applies to his bank for a guarantee in a specific amount.

2. Payment of fees
   The bank charges an annual or one-off fee for issuing the guarantee. This fee is usually calculated as a percentage of the guaranteed amount, often between 1 % and 3 % per year.

3. Issuing the guarantee certificate
   The bank issues a guarantee bond (Bürgschaftsurkunde) and hands it over to the seller or developer. This document serves as the official proof of the bank’s obligation.

4. Calling the guarantee in case of default
   If the buyer fails to fulfil his contractual payment obligations, the beneficiary (for example the seller) may call the guarantee. In that case, the bank pays the guaranteed amount directly to the beneficiary.

Advantages of using a bank guarantee

• Protection for the buyer:
  The buyer does not have to pay the full purchase price in advance and can still provide reliable security to the seller or contractor.

• Greater confidence for the seller or developer:
  A bank guarantee indicates that the buyer is creditworthy and serious, and it reduces the risk of non-payment.

• Financial flexibility:
  Instead of tying up large amounts of capital, the buyer can manage his liquidity more effectively and continue to meet other ongoing obligations.

Risks and considerations

• Ongoing costs:
  The fees for the guarantee can become significant, especially for long-term projects.

• Repayment obligation towards the bank:
  If the guarantee is called, the bank initially pays the beneficiary, but the buyer must reimburse the bank afterwards. This can lead to a considerable financial burden.

• Contract terms:
  The detailed terms and conditions – in particular the trigger events, deadlines and formal requirements for calling the guarantee – should be examined very carefully.

Important tips

• Consult an experienced lawyer before signing any guarantee agreement.

• Compare offers from several banks in order to find the best terms and lowest costs.

• Make sure that your budget can realistically cope with a potential repayment to the bank in the worst-case scenario.

Conclusion

A bank guarantee (Bankbürgschaft) is an important risk management tool in the German real estate market. It offers protection to all parties involved and strengthens confidence in real estate projects. By understanding how it works, what it costs and which conditions apply, you can use this instrument in a smart and safe way to support your property purchase and move towards ownership with greater confidence and stability.

The editorial team of this website strives to provide accurate information based on thorough research and a review of multiple sources. Nevertheless, errors may occur or certain details may be uncertain. Therefore, please regard the information in this article as an initial point of reference and always contact the competent authorities or professional advisors for binding and up-to-date guidance.