Many a lease has been lost when the deal comes down to the cost of the security deposit. Most property managers will agree that a high deposit can discourage an applicant as much as rent cost. Suffice to say, the necessary pledge by the resident to keep the apartment fit as a fiddle, once equal to a month’s rent, is a smaller piece of the rental revenue matrix nowadays so properties can remain competitive.
With rents becoming more competitive in recent months, it’s a good bet that residents will further scrutinize security deposits before signing leases. Already, deposits are not covering bases for properties when damage occurs.
“Deposits have gotten to the point they don’t protect the properties anymore, they are so low,” says DepositIQ Vice President and General Manager Tom Schickel.
‘Competitive’ deposits come with a risk
Generally, deposits are below $500 throughout the industry, Schickel says. But a deposit that’s a fraction of the monthly rent may hardly cover damaged wood flooring or holes in the wall. As it is now, the turnover cost of an apartment, including rent loss, is from $1,000 to $5,000, according to recent apartment industry information.
Offering a “competitive” deposit is sort of a damned if you do, damned if you don’t proposition. The property may have secured the resident over a competitor with a $200-$250 deposit but is risking a big bill to put a trashed apartment back on the market. The deposit is all the property can charge back unless it wants to go through the hassle of trying to collect directly, or use the legal system to recoup additional funds owed.
Then there’s the administrative headache of managing the deposits, including following jurisdictional rules on returning them—the time frame and the interest that must be paid plus any penalties for not following the rules.
“You’re going through the process of collecting a deposit, putting it in the bank, paying interest in a lot of states and returning it to the majority of your renters,” Schickel said. “Most people perform well and you’re going through this entire process for little financial protection. With the exception of a few markets, you’re generally going to be charging approved applicants only a few hundred dollars deposit.”
DepositIQ surety bonds offer lower move-in costs and give property more protection
DepositIQ, recently acquired by RealPage, Inc., is seeing more properties adopt the company’s surety bond program that offers residents low move-in fees and gives apartment owners greater protection. A surety bond costs the resident $175 and provides $1,000 in coverage for the apartment in the event of a claim for loss of rent or damages. Unlike a deposit, the resident doesn’t get the bond fee back at move out. However, the upfront fees are less than traditional security deposits.
Schickel said apartments offer the surety bonds alongside a traditional security deposit program to give renters an option. The difference is that the surety bond gives the resident a low-cost move-in choice while ensuring adequate coverage for the property if a security deposit isn’t chosen.
“The apartment community still has that marketing advantage of offering a low-coast move-in option for the resident without sacrificing protection,” Schickel said.
Rewarding best-quality applicants and lower impact of high-risk renters
Surety bonds are a marketing tool to allow owners and operators to be more competitive in their respective markets by offering a lower cost move-in option, increase closing ratios and improving retention.
“It’s rewarding your best-quality applicants with a low-cost move-in option,” Schickel said. “On the flip side, if you have some higher risk applicants, it’s providing them an opportunity to still afford to move in while giving the property more asset protection than they can have historically.”