We know that traditional security deposits fall short in their risk mitigation capabilities, instead negatively impacting properties at financial, operational, and regulatory levels. Yet, many property owners and operators are unaware how surety bonds — promoted as an alternative to deposits — often compound the risks that deposits introduce.
Our insights reveal that the path to solving the fundamental problem isn’t in the simplification of deposit management or partial measures like surety bonds. These approaches only scratch the surface leave properties exposed to substantial risk. Why, then, does the rental housing industry depend on surety bonds if they are fundamentally unreliable in mitigating risk?
The path to eliminating security deposits from property management requires an understanding of the available options so that you can identify the best deposit replacement solution for your apartment communities. That’s why we are shedding light on common misconceptions about surety bonds, so that property owners and operators don’t get duped and know how to select more dependable loss protection solutions.
Below, we dispel the top three multifamily myths and financial fallacies surrounding surety bonds. We hope this provides clarity as more and more owners and operators are realizing it’s time to ditch security deposits and surety bonds for smarter loss protection.
Though typically marketed as insurance products, surety bonds are structured differently than lease insurance. Whereas insurance contracts only involve the property and carrier, surety bond contracts directly involve residents. The three-party contracts associated with surety bonds can expose renters to financial liability. If a renter fails to fulfill their financial obligations, surety bonds pay the claim filed by the property and collect that amount from the renter.
Surety bond marketing strategies lead renters to believe they are protected, but in reality, they do little to mitigate risk the way a solution like lease insurance does. True insurance, however, pays properties for damages or rent loss without running collections on the renter.
Like lease insurance, surety bonds offer move-in affordability for renters. But surety bonds require separate applications and off-systems processing, creating management challenges and friction in the leasing office. At move-out, renters are often subject to hidden costs. Since bonds are framed as “insurance” for residents, residents expect claims to be covered and can be blindsided when they face collection months after moving out.
Those unexpected charges can have harmful consequences for properties, as well as residents. Communities can be hit by lawsuits and negative online reviews from disgruntled former residents who are surprised by post move-out collections. When a surety bond controls the final aspect of the leasing transaction, it defines the overall customer experience and can jeopardize a community’s reputation.
In contrast, lease insurance is a two-party contract that doesn’t include residents. At the end of a lease, residents can move on without surprise collections, creating a more positive overall lease life cycle for all parties.
Surety bonds only cover up to the total amount of the security deposit. When a bond is raised higher than the deposit amount for greater protection, it merely increases the resident’s cost and offsets the intended affordability. Furthermore, because surety bonds must be sold to and purchased by renters, surety bond programs have significantly low resident adoption rates. When renters are presented with a surety bond option, a significant percentage still opt for antiquated security deposits, which only perpetuates the problem.
While operators may entice some renters to sign surety bond contracts based on the affordable move-ins compared to deposits, the insufficient coverage makes them a risky and costly option. Due to coverage limitations with surety bonds, properties are exposed to substantial NOI loss — which is preventable with a true insurance solution.
Lease insurance can be customized by property to ensure adequate protections and provide coverage levels well above what traditional deposits and surety bonds can offer. In other words, lease insurance sees higher resident adoption and prevents a pileup of unrecoverable bad debt.
While surety bonds appear to be a solution, they wind up an alternative used in addition to traditional deposits. For this reason, surety bonds (aka security deposit alternatives) exacerbate rather than solve the issues with deposits, leaving apartment communities exposed to:
⚠️ negative resident experience
🗃️ administrative strain
⚖️ regulatory risk
📉 NOI loss
Deposit replacement solutions like lease insurance, on the other hand, succeed where deposits and their alternatives have failed. More and more operators realize true replacements like lease insurance dependably minimize those risks. We understand the landscape of deposit alternatives vs. deposit replacements can be confusing, so we break it down for you HERE.
Identifying the critical differences between lease insurance and surety bonds is essential in order for property owners and operators to optimize risk mitigation, operations, leasing, resident relations, and revenue recovery. The rental housing industry has finally recognized the shortcomings of security deposits, but overcoming these issues hinges on selecting the right security deposit replacement.
Want to get rid of security deposits and surety bonds for good? Click below to get a custom NOI analysis and see what your asset performance future could look like with lease insurance from LeaseLock (hint: reclaim NOI you lose with deposits / bonds in place).
