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Security Deposit Replacement vs. Deposit Alternative: Which is Better?

For too long, security deposits have been an albatross around the apartment industry, burdening both residents and operators.

For renters, deposits are an expense few can afford. A study by CareerBuilder found that 78% of U.S. workers were living paycheck to paycheck, meaning nearly 8 out of 10 renters don’t have the savings to pay for an upfront deposit, the average cost of which is $500 to $750. That study was also conducted before the pandemic, which has plunged many into deeper financial distress.

For operators, deposits are a major administrative hassle. They can lead to significant tensions when residents become frustrated with the amount of their deposit refund, and lead to more negative online reviews. To add insult to injury, operators often find that deposits are an inadequate defense against rent loss and unit damage.

Legislation Introduces Security Deposit Replacements & Alternatives

Fueled primarily by growing concerns about housing affordability, jurisdictions across the country have passed — or are considering — deposit legislation mandating the offering of security deposit replacements and alternatives.

security-deposit-alternatives-replacements-legislation-mapGiven the growing momentum behind this movement, operators are left asking: What are the differences between deposit replacements and deposit alternatives? And which is better? We explore both of these issues below.

What Are Security Deposit Replacements?

Security deposit replacements differ from deposit alternatives in that they seek to completely remove and replace costly deposits with more affordable options such as lease insurance. The goal of a deposit replacement is to help both renters and operators by 1) giving renters an affordable, deposit-free move-in and 2) providing properties enhanced protection.

Recently, Pennsylvania House Bill 2427 began the legislative movement toward total deposit replacement. Like the Cincinnati law, HB 2427 would require apartment operators that charge security deposits to offer residents an alternative, such as a surety bond or an installment plan.

However, the Pennsylvania legislation goes one step further by giving apartment operators the choice to replace security deposits entirely through lease insurance.

What Are Security Deposit Alternatives?

Examples of security deposit alternatives include surety bonds, rent guarantees, deposit installment solutions, and credit authorization services.

It’s important to keep in mind that deposit alternatives do not get rid of deposits entirely. Rather, an apartment community offers them in addition to traditional deposits. The aim of deposit alternatives is to give renters a choice in how their money is managed and to offer a cheaper move-in experience.

However, alternatives can still present operators with a considerable administrative burden, and require significant onsite training.

Cincinnati’s new Renter’s Choice Law offers residents affordability help through deposit alternatives. Specifically, the law mandates that if an operator requires a security deposit, a deposit alternative must be offered as well. The available alternatives include a surety bond, an installment plan to pay the full deposit, or a smaller upfront deposit that cannot exceed 50% of the first month’s rent.

How Do Deposit Alternatives and Deposit Replacements Differ?

To better understand the differences between deposit replacements and alternatives, let’s consider their benefits and drawbacks.

First, the pros and cons of deposit replacements:

  • Pro: Totally eliminates expensive deposits.
    • With lease insurance, renters simply pay a small monthly, non-refundable fee that waives the deposit requirement and generates coverage on every lease that far exceeds what the typical deposit or alternative provides.
  • Pro: More protection for properties.
    • A standard plan offers $5,000 to cover rent and damage on every new lease.
  • Pro: High conversion.
    • Unlike surety bonds, 96% of renters participate in lease insurance at communities where it is available — it is not required, but it’s adopted at extremely high rates due to its affordability and convenience.
  • Pro: Native lease integration.
    • Lease insurance requires no separate registration, application, or billing process for residents or operators.
  • Con: More coverage than may be needed by some.
    • Some communities with very minimal damage or rent losses may feel they don’t need a full $5,000 coverage — however, lease insurance offers alternate lower tiered coverage plans for low rent markets.
  • Con: Uncertainty in major change.
    • Replacing security deposits entirely is a big shift for the apartment industry. Property managers may initially be skeptical of going Zero Deposit much like they were reluctant to request renters insurance which is now common practice across the enterprise marketplace.

And, the pros and cons of security deposit alternatives:

  • Pro: Upfront affordability for renters.
    • For example, to purchase a surety bond, a renter pays only a portion – typically 17.5 percent – of the total security deposit amount at move-in as a non-refundable fee.
  • Pro: Alternatives give renters a choice.
    • Renters are able to determine how they want to spend their money at move-in, giving them more control of their move-in budget.
  • Con: Potentially negative move-out experience and negative online reviews.
    • In the instance of surety bonds, because residents are putting money down upfront, many think they’re purchasing security deposit coverage when they’re not. If the apartment community makes a claim against the resident, the surety bond company will pay the property up to the total deposit amount. The bonding company will then run collections on the renter; frequently, the resident is not expecting this expense and can become angry and write a bad online review about the apartment community.
  • Con: Lower protection for operators.
    • Typically, alternatives such as surety bonds or installment plans cover the cost of the security deposit. Many apartment communities are finding that the amount of coverage provided by security deposit alternatives is inadequate to cover rent loss and unit damage.
  • Con: Deposit alternatives can present significant administrative and onsite challenges.
    • They are difficult to manage, require separate applications and off-systems processing and, even though residents don’t like traditional deposits, the adoption rate for deposit alternatives remains low.

Which One Is Better for Apartment Operators?

There is a real hunger in the apartment industry to move away from traditional security deposits.

Deposit alternatives are billed as improving the affordability of move-in, and they do that. But they still present administrative stress, and the protection they offer against damage and unpaid rent can be seriously lacking – especially in the pandemic.

A deposit replacement like lease insurance offers the double benefits of a much cheaper move-in for residents and truly comprehensive financial protection.

As legislators across the country consider how to tackle deposits, they would be wise to follow Pennsylvania’s example and ensure their laws pave the way for total deposit replacement.