Alternatives to Security Deposits?

Question

I recently ran across three companies that issue Surety Bonds as an alternative to security deposits. The idea is simple: instead of requiring tenants to front a hefty security deposit up front -- could be $2,500 around here -- they can essentially buy insurance and pay a small premium, one time, for a fraction of the cost.

If they default or leave damage, you (property owner) are named as insurance beneficiary and collect damages up to the amount of the security deposit.  One company claims to service 1 million units (I find that unlikely).

PROS
-property owner can require a much "higher" security deposit/coverage  using this system since the premium is still low for the tenant, thereby increasing your protection AND reducing their costs
-increases the pool of tenants who can afford to move into your place

CONS
-might be hard to get the surety bond to pay out for damages
-probably requires more paperwork
-unsure of how state landlord-tenant laws would react to payment; they often have a lot to say about how a landlord handles security deposits but are mum on surety bonds / insurance.

[size=18]Has anybody used these and what did you think?[/size]
-Jeff

N/A N/A · Answer

Using a surety bond rather than posting cash for an apartment lease is nothing new.  However, the current surety bond market is rather conservative due to record losses around the turn of the millenium.  Financial guarantee bonds like this are considered hazardous and are not written often.

My surety bond agency writes bonds nationwide through 16+ surety carriers, but not one of them is willing to write this class of business.

It will take a lot of searching to find a company willing to back this type of bond for you, good luck!

Jeff Takle · Answer

I would suppose that you could "up" the security deposit amount for the surety bond in order to compesate for potentially lost rent, e.g. If a tenant had a choice to pay $1,500 for a security deposit or $350 for a $3,000 surety bond payable to you, I have to believe they would go for the $350 surety bond.  Less risk for them and greater protection for you.

Although tenants get the deposit back after move out, it's such a hassle and always contentious if a landlord has to deduct anything that I think a lot of tenants would rather just pay the bond and be done with it.

Josh Stack · Answer

I'm resurrecting a super old thread here, but does anyone who currently haunts these forums use surety bonds in lieu of security deposits?

Lynn Z · Answer

have you all noticed no one knows how to clean a stove or refrigerator these days? Not to mention the mini blinds are always pulled up to the top as if they are hiding dust and you won't notice.  And those pesky furnace filters are over their heads.  The best trick I've tried is a lease agreement that allows quarterly pest spraying and the landlord to be present.  That way the filter can be checked and changed if necessary.

Get the security deposit.  they usually are getting it from a credit card source anyhow.  People are pretty broke right now I fear.

N/A N/A · Answer

Call me a traditionalist, but I'm more comfortable with a good old fashioned security deposit. I like to think that forking over a month or two's worth of rent in actual money (as opposed to an insurance premium) strikes a little more fear in the eyes of a tenant when it comes to keeping the place in good condition when they move out. Even if the insurance were to pay out more, I'd rather have the place not damaged (or dirty) to begin with.

Jeff Takle · Answer

Here is the best explanation I've got about why small landlords will probably not get an option to do surety bonds through an insurance provider option:

I see no reason you couldn't do this on your own without an insurance company. Advertise "No security deposit for good credit" and offer them an alternative (not insurance) to pay $300 non-refundable fee instead of a security deposit. Oh well, on to something else...

J

Jeff Takle · Answer

just looking for alternatives and solutions. Also considered this:

Instead of paying a $1,200 security deposit all at once, pay deposit as add'l $150 per month.

These things might not be as important in central Ohio or Texas where rents are lower, but in NYC you may pay 2x month's rents as broker fee, plus first, last, and security deposit. Move in expenses can exceed $8,000-$10,000. Any way to cut them helps increase the pool of tenants.

N/A N/A · Answer

Tenant:  "I can do $1500 worth of damage with no fear of recourse!"

Frank Adams · Answer

takleberry wrote;

Let's see, companies who do this for a living, who have access to all the actuarial data in the world WON'T do this! But you think it's a good idea for the average landlord, who has NO IDEA (OK, maybe some little idea) of how to analyze risk, to do it.

all cash

Jason Barnett · Answer

Jason,

Yes you are right, but the question is whether or not you can make the numbers work in your favor (over time).  As takleberry mentioned above your risk is limited to the "delta" and the viability of the idea depends on how the averages work over a large number of tenants.

I think the idea can work, but the devil is in the details.  How much is enough?  Are there non-financial things you can do to get a person to leave a unit in good condition when they leave?

I read something else that might work well here.  There are some landlords that will offer a "prize" for tenants that stay with them for a year.  Perhaps a person would take care of the unit if they know you're going to buy them a new TV ($100 at Wal-mart).