12
Apr 22

Alternatives to Security Deposits: What to Consider

Posted by: Entrata | Category: Leasing,Newsletters

For all of the positive elements offered by the apartment world, the industry sometimes makes national headlines for dubious reasons. Most often it’s due to the issue of housing affordability, and traditional security deposits can be a major accomplice to the problem. 

Paying hefty rent prices is challenging enough for many renters. And with the national average rent hovering in the $1,500 range, asking residents to pay first and last months’ rent as part of a security deposit sometimes isn’t feasible. A recent Renter Sentiment Report from Jetty indicated an even split between renters able and unable to afford a security deposit. 

In the past, a security deposit was simply part of the territory if you wanted to rent an apartment. But that practice has become such a problem for both renters and operators—who lose out on many potential renters because they can’t pay the exorbitant upfront costs—that many property managers are opting to break the mold. 

In fact, numerous startup companies and services have sprouted up in recent years to offer alternatives to security deposits. There are so many, in fact, that it can be difficult to track the capabilities and decide on the right fit. That’s because there is no singular solution, and each of the alternatives has its own nuances. 

These include surety bonds, guarantors, credit authorization and lease insurance. Each of these share the common objectives of reducing the time and friction surrounding the application-to-lease process, relieving the financial burden from the resident and ensuring properties are covered for any damages. But each option has challenges, as well. 

Surety bonds consist of a pool of money that can be used when damages occur. The third-party provider pays the property then invoices the resident. However, residents often end up paying a monthly fee (or one-time fee) for the service, which somewhat defeats the purpose. 

Guarantors help those with low or invisible credit scores qualify for leases, but they don’t necessarily replace deposits. Credit authorization services create the capability to withdraw money from a resident’s account when damages occur, which essentially guarantees they’ll pay for any damages and eliminates the need for a traditional deposit. The resident and community team must agree on the precise charges, however. 

Lease insurance eliminates traditional deposits by adding a much more affordable policy to the rental agreement. Like most of the other solutions, a third-party pays the property to cover any damages then bills back the resident, who pays for any damages above their coverage limit. These are designed to provide the community with higher protection levels from bad debt than traditional deposits. But unlike traditional deposits, lease insurance policies don’t refund departing residents who never have to use them. 

Five years ago, it was difficult to imagine an apartment world without security deposits. Properties need them to safeguard against damages and ensure residents have the capability to pay their rent. But traditional deposits are becoming even more of a burden for new residents in the harsh economic climate, particularly when combined with moving costs, pet fees and other upfront costs associated with moving. 

Alternatives are now widely available, which is a solid first step. But just like any innovations, they can be refined as they evolve. The initial solutions are serving as a solid case study for what is most effective, and they, too, are often being adjusted on the fly. The perfect solution has yet to be found, but with increasing regulation and new legislation touching the topic, one thing is certain: We’re sure to see many more flavors of deposit alternatives in coming months.