For already cash-strapped tenants, paying thousands of dollars in an upfront security deposit becomes a barrier to necessary housing. According to Paraag Sarva, CEO, and co-founder of Rhino, residential security deposits total $40 billion in just the U.S. market. But is there any alternative when a security deposit is vital to protecting the landlord and property from potential damages? Some advocates and legislators say yes, and it comes in the form of “renters’ choice” bills. However, while some landlords have embraced alternatives in the past, some tenant advocates think they should no longer have a choice. So, check out everything landlords should know about renter’s choice deposit alternatives below.
What is a Traditional Security Deposit?
A rental security deposit is a set amount of money paid before taking occupancy of a rental property. Typically, the deposit ranges between a few hundred dollars to up to two months’ rent. These monies are held by the landlord for the duration of the lease and either returned to the tenant or withheld for damages.
What are Renters Choice Deposit Alternatives?
Security deposits alternatives encompass a range of options but typically fall into three main categories – lease insurance, surety bonds, and pay per damage. That said, the primary goal is to avoid the considerable cash burden for tenants while still protecting owners. Besides these options, some landlords resort to installment plans or credit authorization services that pre-authorize the tenant’s account and withdrawal automatically if damage occurs. Let’s review these options in greater detail below.
Lease Insurance
Lease insurance boasts a way to eliminate costly deposits while still insuring the property against damage and rent loss. Furthermore, it avoids the need for guarantors or complicated surety bond applications. In most cases, lease insurance involves a small monthly payment that gets collected along with the rent. This is a popular option with landlords due to the effortless collection and minimal added paperwork. For example, companies such as LeaseLock can fully integrate with a landlord’s leasing software to provide seamless and stress-free processing.
Surety Bonds
The most popular and arguably most debated renter’s choice deposit alternatives are surety bonds. As opposed to no deposit, this option typically costs as little as 17.5% of a traditional security deposit. That said, this percentage buys the backing of a third party that acts as a middleman between tenants and landlords if damage occurs. Depending on the company, tenants may need to pay a small monthly fee for coverage. While tenants do not have to come up with large sums of money upfront, this does not mean they are off the hook for damages. So, instead of paying the landlord directly, the bond company pays and then pursues the tenant for reimbursement. Another important factor is, unlike traditional deposits, any monies paid to the bond company are non-refundable. Top companies making a name for themselves include Rhino, SureDeposit, and Jetty Deposit.
Pay Per Damage
Pay per damage is a lesser-known alternative to expensive security deposits. In this instance, a third party manages a secure bank account that allows landlords to bill tenants for damages up to the amount of a traditional deposit. That said, the account has limited access and therefore ensures landlords do not overcharge tenants. Additionally, tenants have the option to dispute claims and pay in installments for larger repair bills. Meanwhile, no large sums are needed upfront, but there are likely transaction fees based on the claims that do come through. Again, however, this is still a cheaper alternative to traditional deposits.
Recent Legislation on Renter’s Choice Deposit Alternatives
States and local jurisdictions have considered taking steps away from traditional security deposits in favor of renter’s choice deposit alternatives. The goal is to reduce the financial burden on incoming tenants and keep more money working in the economy. Cincinnati, OH, was the first to pass legislation on renter’s choice deposit alternatives, followed closely by Atlanta, GA.
This means that landlords in these jurisdictions are now required to accept alternatives to large lump-sum deposits. In Atlanta, for example, the new ordinance stipulates that a landlord must offer deposit alternatives in the form of security insurance or installment plans. That said, Cincinnati and Atlanta are just the beginning.
So far, alternative deposit legislation is gaining momentum and support in 20 other states, including Virginia, Pennsylvania, Maryland, New Jersey, and New York. However, while lawmakers may be on board, landlords are a bit warier.
Why are Renter’s Choice Deposit Alternatives a Good Thing?
- Less Financial Burden – Requiring tenants to provide the equivalent of one or two months’ rent as a deposit is an immense worry. After all, moving expenses, first months’ rent, application fees, and miscellaneous financial needs can all add up fast. So, by giving tenants alternative options like installment plans, it can reduce the burden of upfront costs.
- Access for All – Expensive deposits can become a barrier for many tenants seeking equitable housing. As the market becomes more and more competitive, those unable to come up with the funds quickly are at risk of losing out. However, deposit alternatives help to level the playing field.
- Damages Still Covered – Even without a large deposit upfront, the renter’s choice deposit alternatives still protects owners from being stuck with the bill for tenant damage. However, instead of deducting the funds themselves, these options typically involve a third party.
The Downsides of Alternative Security Deposits
- Someone is Cashing In – In a traditional security deposit transaction, the tenant puts up money in case of damage. However, if the tenant does not cause any harm, the landlord must return their deposit. That said, using renter’s choice deposit alternatives through a third party generally means any money paid in is non-refundable. Furthermore, these monthly fees or deposit percentages are charged regardless of whether the tenant damages the unit. So, instead of a traditional security deposit where a tenant can get at least some or even all of their money back, alternative options help third-party companies cash in big!
- New Laws Bring New Problems – Current security deposit laws are thorough and straightforward. The landlord must collect and hold the money for the duration of the lease. Following move-out, the landlord has a set number of days to either withhold or return unused funds. If the landlord fails to do so, legal consequences apply. That said, deposit alternatives are new, and the laws have not caught up to their growing popularity. In some cases, companies have misrepresented these transactions as “insurance” when the deposit does not protect the tenant from claims. Therefore, tenants and landlords must use caution to avoid disputes.
- Read the Fine Print – Some companies claim to sell “deposit insurance”; however, the actual product is more like a bond than insurance. While this may seem like an insignificant detail, the implication is huge. Insurance means that the third party assumes financial responsibility for the actions of the insured. That said, in the case of a surety bond, the third party agrees to pay the landlord but will then pursue the tenant for reimbursement – and sometimes quite aggressively so. So, always carefully read and understand the terms of any alternative deposit option you choose.
Protect Your Investment with Professional Property Management
Security deposits of any kind are vital to protecting a landlord from tenant damage and costly unexpected lease breaks. That said, there are many ways to protect your interests as a landlord, and one is through professional rental management. Property managers understand the local, state, and federal laws that govern all aspects of the rental process. Through qualified representation, owners can maximize their investment while balancing the needs of tenants. At Bay Property Management Group, our team handles all day-to-day operations, therefore alleviating these daily stresses for property owners. So, if you would like to learn more about how full-service management can help your business, give us a call today.