Learn why lease insurance offers better protection than surety bonds, providing broader coverage, flexibility, and faster claims resolution.

Multifamily historically has been slow to embrace technology, but the industry countered that notion with its recent tech renaissance during the pandemic. Almost overnight, tech solutions went from last resort options to first-strike weapons in the industry’s effort to solve emerging issues. These technologies may have been a long time coming, but their fast-tracked implementation demonstrates multifamily can move with agility when need be.

A Growing Multifamily Trend: Avoid, Transfer, & Mitigate Risk With Insurance Technology

Spurred by today’s economic uncertainty, there is another dramatic shift taking place in multifamily – the trend towards insurance technology to manage risk and protect against financial loss. Between resident screening, renters insurance, and lease insurance, savvy operators now leap at the opportunity to engage different risk management tools to avoid, transfer, and mitigate risk throughout the lease lifecycle.

Resident screening helps avoid risk by identifying fraudulent applications and risky renters, and renters insurance programs enable operators to transfer risk to resident policies—both integral to operators’ risk management strategy. Now, more and more are looking to mitigate risk by implementing lease insurance to solve the long-standing failures of security deposits. With lease insurance, operators reduce their exposure to potential loss caused by residents and improve property performance.

In particular, there are three use cases driving operators to replace traditional security deposits with lease insurance as a better loss protection strategy:

1. Move-In Affordability for Residents
2. Modern Risk Mitigation Solutions for Apartment Communities
3. Maximized Revenue & Smarter Risk Assessment for Operators

3 Reasons Multifamily Is Moving Away from Traditional Security Deposits & Surety Bonds Towards Lease Insurance

1. Move-In Affordability for Residents

Economic uncertainty and housing supply shortage accelerated the housing affordability issue for apartment renters nationwide. With 58% of Americans living paycheck to paycheck, a majority of Americans lack the funds to cover an unexpected $1,000 expense. In addition, full-time minimum wage workers can’t afford rent in 93% of U.S. counties, while over half of all US apartment households spend nearly a third of their income on rent.

Record-breaking rent growth has made renting an apartment particularly expensive, especially security deposit costs. This creates a large financial burden for renters but also puts operators in a bind—either they charge deposits to protect against loss and suffer low lease conversion rates or offer lease concessions to attract residents but sacrifice proper protection in the process.

And while surety bonds offer move-in affordability for renters with low-cost monthly payments, these deposit alternatives are a crude form of insurance that offer insufficient protection against rent loss and damage that have poor resident adoption. In this case, operators sacrifice long-term revenue to maintain physical occupancy levels in the short-term.

On the other hand, lease insurance removes the upfront cost posed by security deposits and adequately protects operators against rent loss and damages, all in a resident-friendly format. Instead of using a blanket security deposit amount or a low-cost, high-risk surety bond program, operators can seamlessly deploy lease insurance to both create more affordable move-ins and unlock smarter risk prediction and historical data at the property level to determine optimal insurance coverage. This leads to a better resident experience, higher lease conversion, and increased economic occupancy.

“It’s more important than ever that operators offer an affordable move-in experience for residents while also protecting themselves from potential rent loss. [Lease insurance] enables us to do exactly that [which is] a stronger, more sustainable insurance product relative to surety bonds.” – Ian Bel, managing partner at Olive Tree Holdings

2. Modern Risk Mitigation Solutions for Apartment Communities

Surety bonds and other deposit alternatives have sought to replace outdated, traditional deposits, but even as security deposit legislation spreads nationwide, it’s becoming more apparent how these partial solutions actually introduce new types of risk that create financial, administrative, and regulatory burdens for operators as well as negative leasing experiences for residents.

For example, surety bonds leverage off-system application processes and manual claims forms, creating more administrative work for onsite teams and a clunky process for residents, thus leading to less than 50% resident adoption rates. New deposit laws also present new restrictions and increased deposit administration, adding unnecessary complexity to regulatory compliance. In addition, deposit alternatives leave residents fully liable for claims paid to their property, resulting in displeased renters, negative online reviews, and potential move-out disputes.

“If a prospective resident doesn’t have to go in and deal with their surety depositor to set up their bonds, that helps. Having that lease insurance process integrated into the property management system creates a simple, streamlined process, and has the ability to improve conversion rates.” – Andrew Gordon, Chief Operating Officer at Strata Equity Group

Lease insurance, however, is a modern loss protection solution that replaces traditional deposits and alternatives integrating within the native workflow from the point of application all the way through the move-out claims process. This means property teams are relieved of administrative strain and expedite claims in the leasing office, residents get a hassle-free lease experience with no out-of-workflow applications or surprise deposit deductions, and owners reduce bad debt and increase asset value and NOI.

“[Lease insurance] has proven to be the long-term solution to remove deposits [by delivering] a seamless, accessible, and affordable move-in experience, greater risk mitigation, higher bad debt recovery, and stronger NOI – all things any property management company needs to get right from the beginning.” – Jennifer Staciokas, Executive Managing Director of Property Management for Western Wealth Capital

3. Maximized Revenue & Smarter Risk Assessment for Operators

Balancing the need to maximize NOI with heightened renter affordability concerns along with strong multifamily occupancy rates has prompted many apartment operators to offer concessions (i.e., deposit-free move-ins) to remain competitive.

However, this scenario has negative implications, including insufficient protection when a resident doesn’t pay rent or causes substantial damage to their apartment home. With no way to assess risk and subsequently cover losses, an operator’s economic occupancy diminishes.

“Residents want what they want when they want it and how they want it. We want to incorporate [giving our residents more options] into the way we operate, but we have to mitigate the risk upfront rather than being too proud of 100% occupancy. We’re using screening verifications up front, and [lease insurance] has been a tremendous value on the back end.” – Marcie Williams, CEO at RKW Residential

While some operators opt to utilize surety bonds as a deposit alternative, the risk of economic loss persists. Consider the loss ratio formula of surety bonds: a surety bond program contributes on average $50 in premium to the denominator of the loss ratio equation. This amount is insufficient compared to the average amounts that must be paid out in claims. In this case, the surety bond carrier loses money while the bonding company continues to take on new risk.

Following the pandemic, the industry is likely to experience an influx of claims outflows for months, or even years, to come. As a result, surety bond pools will deplete, leaving operators exposed to a high level of risk and account balances (i.e., bad debt). For this reason, operators need a risk mitigation solution like lease insurance that effectively assesses risk and absorbs account balances to maximize revenue.

“Frankly, the security deposit is a thing of the past. Financially, they – along with alternatives like surety bonds – don’t make a lot of sense. They don’t correlate to the amount of damage that could be done to a unit or the potential amount of debt. They’re just not relative to the risk.” – Mark Stringer, Executive Vice President for Avenue5 Residential

Risk Prediction Is the Long-Term Solution for Smarter Loss Protection

In today’s economic climate, savvy operators are looking for better risk mitigation solutions and stronger loss protection strategies that address the use cases outlined above: renter affordability, modern risk mitigation solutions, and risk assessment capabilities. This is why more and more are shifting away from expensive, traditional, risk-prone security deposits and surety bonds to affordable, innovative, and data-driven insurance technology solutions, like lease insurance.

“Surety bonds and other alternatives don’t hold a candle to lease insurance. It makes move-in affordable for our residents and dramatically increases our protection against rent loss. In any economic environment it is important we reduce upfront costs for residents while still mitigating financial risk for our communities.” – John Detore, Director of Asset Management at White Oak Partners

Ultimately, the most promising aspect of lease insurance lies in the value of risk prediction. With predictive risk monitoring at its core, LeaseLock’s lease insurance platform can analyze ledger balance trends and billions of risk data points sourced from PMS and third-party data to project potential resident loss and optimize coverage accordingly.

Rather than relying on an arbitrary security deposit amount or partial solutions (e.g., surety bonds) that add layers of risk to leasing, LeaseLock wields the power of data and AI to adapt insurance coverage so operators can rely on optimal revenue protection across their entire portfolio–far more than what’s provided by traditional deposits and bonds.

Conclusion

Operators today need to better manage loss and drive asset value. While lease insurance programs provide stronger loss protection strategies that optimize asset performance, not every program is created equal—operators need a smarter, more sustainable risk mitigation solution. Only lease insurance steeped in AI and data analytics to effectively predict risk can offer this.

The Covid-19 pandemic is finally fading away, and the ensuing economic recovery and employment growth have fueled unprecedented demand for apartment homes. That demand has led to off-the-charts rent growth.

To optimize this momentum, operators are seeking competitive advantages in their efforts to land prospective residents. Unfortunately, resident preferences are a moving target. They now prioritize customization, convenience and modern technology in the form of flexible rent payments, deposit-free move-ins and remote work accommodations.

During the recent webinar, Tech Hacks That Boost Lead Conversion Without Sacrificing NOI, moderated by LeaseLock Chief Revenue Officer Ed Wolff, industry leaders explored strategies for meeting current renter preferences.

A Balancing Act: Lease Concessions vs. Economic Occupancy

The key, according to webinar panelists, is balancing incentives and concessions with economic occupancy. While upfront lease concessions may help to fill vacancies, they don’t help to protect against bad debt or bolster property level budgets. In fact, short-term promotions often result in long-term liability by attracting high-risk renters and exposing operators to unrecoverable debt.

Short-Term Promotions = Long-Term Liability

Multifamily management companies are increasingly turning to tech solutions to future-proof their operations while also boosting the volume and quality of leasing funnel activity.

“What we are seeing that is different this year is an influx of leads that are coming into our onsite teams,” said Jennifer Staciokas, Executive Managing Director of Property Management at Western Wealth Capital. “You may think of that as being a positive, but at the same time that requires our onsite teams to handle more leads that may be unqualified.”

Staciokas said Western Wealth Capital (WWC) has deployed lease-nurturing solutions and automation tools like chatbots and voicebots to streamline the applicant screening process.

“It’s all about attracting the right residents,” Staciokas said. “You have to be really mindful of the promotions that you’re offering. You don’t want to sacrifice your collections and your economic occupancy for that quick fix on the front end.”

Marcie Williams, CEO at RKW Residential, said mitigating that risk upfront is essential. At RKW, that has meant retracting some of the tech solutions deployed during the pandemic.

“By allowing prospective residents to tour the apartment by themselves and by allowing them to apply online, what’s happening is it’s increasing fraud,” Williams said. “When we only have one or two apartments available, it really becomes detrimental to our business. We have disabled online leasing and we’re inviting qualified applicants to lease rather than letting anyone do it whenever they want.”

Consider the risk security deposits are meant to protect against — 65% of operators in our 2021 survey said unit damage expenses exceeded the security deposit amount. What happens to operators if the resident doesn’t pay rent or moves out, leaving significant damage behind? In the long-term, move-in incentives introduce risk as promotions like gift cards or first-month-free offers may attract an applicant profile characterized by less financial stability and higher damage risk.

Harnessing Greater Risk Predictability During Economic Uncertainty

Both RKW and WWC shifted their approach to prioritize renewals over new leases, and enhanced their screening processes to include AI screening, ID authentication and pay stub verification. They also implemented LeaseLock to replace security deposits and increase protections against property damage and rent loss.

“Lease insurance was a large initiative of ours last year, just to make sure we have more protection than a traditional security deposit,” Staciokas said. “If you have $500 for a security deposit, and we can now get $2,500 coverage (via lease insurance), that is certainly going to reduce bad debt.”

It also increases flexibility for renters, who may struggle to produce the funds for a security deposit. LeaseLock enables residents to pay a monthly fee in place of prohibitive upfront deposits. Coupling LeaseLock with options like flexible rent payments helps operators meet renter demands for customized payment options, which is crucial as more workers become part of a gig economy.

“Residents want what they want when they want it and how they want it. What has fundamentally changed is how we serve our residents to give them more options,” Williams said. “We want to incorporate that into the way we operate, but we have to mitigate the risk upfront rather than being too proud of 100% occupancy. We’re using screening verifications up front, and LeaseLock has been a tremendous value on the back end.”

Integrated Technology That Delivers True NOI Impact

In today’s multifamily environment, integrated technology solutions that enhance one another and create opportunities for new efficiencies deliver the biggest impact on NOI. Solutions that enable centralization of on-site tasks and non-resident-facing positions, while also solving for specific operational pain points, maximize property performance.

“If the technology cannot integrate, we stop the conversation. If it can’t integrate with all the other systems we’re using, it’s not going to work,” Williams said. “It’s not fair to our teams, especially if we want to retain our talent, because it makes their jobs harder. With all of these technologies and all the tech sprawl, integrating into a platform that is easy for the residents to use and easy for the operators to use is the ultimate game-changer. That’s time and money well spent.”

With staff shortages being a top multifamily challenge, property management companies are looking to adopt processes and systems that improve operations—not strain them. This means operators will sometimes forgo financial opportunities if they think those opportunities will only add to property teams’ workloads.

So how can multifamily operators ease the lift for site teams while also improving financial performance?

The Multifamily Case for Total Deposit Replacement

In our newly released white paper, we explore why the industry needs to remove one particular risky financial instrument (security deposits) and replace with an optimally secure solution (lease insurance). We also outline the drawbacks when operators turn to “deposit alternative” products, as these seemingly “easy” fixes often only exacerbate the problem.

Finally, we describe three key benefits for operators when they completely eliminate deposits, including:

1. Significant bad debt reduction
2. Drastically less deposit administration and risk
3. Improved customer experience

Below is a quick preview of the white paper content — to download, click the button below:

[cta_button link=”https://info.leaselock.com/3-reasons-deposits-need-replacement-not-alternatives” text=”Get Free Copy”]

3 Benefits of Replacing Deposits the Right Way

1. Recover Bad Debt

While many operators may not think bad debt is a problem for their firm, most have at least some level of bad debt. This means there’s an opportunity to convert that bad debt into dollars that fall directly into the operator’s bottom line.

Multifamily communities have primarily managed bad debt via three levers: screening, deposits, and collections. In particular, security deposits are a crude form of insurance that often leave operators with expenses greater than the deposit after move-out, which is why properties accrue bad debt.

To ensure operators don’t miss out on the opportunity to recover bad debt, properties need to instead insure as many leases as possible with a deposit waiver product. Ultimately, this arrangement achieves a powerful win-win of both affordability for residents and significantly more coverage for the owner.

2. Reduce Administration & Risk

On top of being pesky, security deposits introduce a great deal of risk. Renter’s Choice laws that require apartment operators to offer an alternative to a security deposit are restrictive and create additional administrative burdens for property teams, including more compliance complications. As a result, many operators are considering deposit alternatives without understanding the new risk associated with them.

Deposit alternatives that are marketed as “security deposit insurance” leave operators exposed to substantial risk. In many cases, these “insurance products” are actually surety bonds which can create confusion and frustration when the bond company collects on renters after move-out.

It’s in the best interest of operators to avoid deposit alternatives and replace deposits with a true insurance program that takes the renter out of the equation, thus minimizing the amount of risk and workload.

3. Improve Customer Experience

In addition to creating administrative headaches, security deposits also have the potential to damage the resident experience. Between sticker shock at move-in and disputes at move-out, this creates a poor customer experience which can lead to negative online reviews for apartment communities.

While operators may consider implementing deposit alternatives to solve for this, these partial solutions wind up compounding the problem, as departing residents find out they’re responsible for paying the bond provider and may express their frustration in the form of negative reviews. Further, this method leaves the leasing transaction under the control of a third party, meaning operators are unable to protect the customer experience.

When the operator is insured though, residents don’t have to worry about unforeseen collections. This is another reason why ditching deposits entirely and replacing them with lease insurance is a better, more sustainable solution, as it lets operators control the customer experience.

Free White Paper: 3 Reasons Deposits Need Replacement—Not Alternatives

To learn how to move beyond deposits so your firm can boost financial performance, reduce the workload on your property teams, and improve your customer experience, download the white paper — click here.

In the previous two articles in this series, we outlined two reasons why multifamily operators should consign the use of security deposits to history.

First, we talked about how many operators are missing opportunities to eliminate bad debt and how, even in cases where they don’t have a lot of bad debt, there is usually still free money to be had. By insuring leases instead of burdening operators and renters with security deposits, operators can reduce bad debt risks and eliminate deposit headaches for good.

Next, we looked at the growing risk of deposits and deposit alternatives, explaining how operators get out from under the burden of administrative overhead and risk by replacing deposits completely. In that post, we also highlighted the different risks associated with some popular deposit alternative products.

One impact of security deposits is left for us to talk about, and it may be the most important one. The potential damage that they do to prospect and resident experiences.

Customer Experience at Move-In and Move Out

It is not hard to imagine how security deposits can negatively impact customer satisfaction. In fact, deposit requirements often leave a sour taste in your resident’s mouth, compromising a community’s value proposition and future marketing activities.

The biggest and most obvious issue is affordability. When renting an apartment entails paying a large lump sum upfront (typically equal to one month’s rent), there may be resulting sticker shock for some prospective renters. Deposit requirements shrink the pool of potential renters, and the problem will worsen as more and more competitor properties find ways to reduce deposit-related costs.

The other problem emerges when residents move out. From time to time, residents are surprised when they do not receive some or all of their security deposit refund. These can result in disputes (including legal disputes) when residents disagree with and are unpleasantly surprised by the amount (if any) of their refund.

Surprises like these tend to manifest as negative online reviews left by disgruntled residents. The prominence of online reviews as a data point for renters choosing a place to live has made reputation scores an all-important currency in apartment marketing. Operators need residents to post positive reviews after moving out. To this end, it makes sense to optimize the whole resident experience, not only because it’s the right thing to do but because it’s also in the community’s best interest.

The bottom line is that in a competitive market, no community should want to be more expensive or have lower review scores than its competitors. Security deposits put operators at risk on both fronts.

Why Insurance Is the Better Option

The problems that come with security deposits are exacerbated by some of the “deposit alternatives” that operators are currently considering. As we discussed in our last blog on this topic, most deposit alternatives are based on surety bonds and tend to be positioned as insurance products. Renters who purchase products like surety bonds are therefore led to believe that they are insured against potential damages or losses at the end of their residency, as they would be with a traditional deposit.

Sadly, that isn’t the way these surety bonds work at all: in fact, the bond provider retains the right to pursue the resident for any money that they, the provider, must pay to the multifamily community on behalf of the resident. When a departing resident learns they are responsible for paying the bond provider, it usually comes as a surprise, and is a natural motivation for a negative review, representing an unwelcome and unnecessary risk to the community’s online reputation.

The involvement of third parties in the deposit transaction raises a broader point about the prospect and resident experience. When a third party takes over part of the leasing transaction (which is what happens with most deposit alternatives), they also take a part in controlling the customer experience.

Given the time and effort operators invest in their leasing processes, this is a suboptimal approach and one that can go quite badly for our residents, especially in the case of collections described above.

A much better way of ridding properties of security deposits is to replace them entirely with lease insurance. When the operator is the one who’s insured, there is no need for residents to leave the leasing process (i.e., to go to a third-party site). Operators maintain complete control of the customer experience throughout the entire leasing process. They also enjoy vastly higher adoption rates, with average uptake rates well above 90%*.

The Win-Win

A participation rate over 90%* matters: it means that all but a few leases are ultimately free of deposits. It forms part of the community’s value proposition that all residents can consistently understand. It is a win for the overall customer experience, but above all else, it delivers a powerful win-win.

It’s a win for operators because true lease insurance increases coverage and lowers bad debt while ensuring a consistent and authentic customer experience. It’s a win for residents because it delivers greater housing affordability by removing the burdensome upfront security deposit. It also avoids the risk that a third-party surety bond company will collect on the resident if they (the bond company) has to pay the operator.

Deposit surprises are usually bad, whether it’s sticker shock during the move-in process or a move-out surprise. As we have argued throughout this series, it’s time to replace security deposits altogether. It’s time to embrace true insurance products that can deliver the customer experience and performance improvements that are already benefiting a growing number of multifamily operators.

*Communities adopting LeaseLock’s lease insurance achieve average adoption rates of 92%

In today’s multifamily market, the issue of bad debt is not always top of mind. Eye-popping year-over-year rent increases and uncomfortably high occupancies create a natural tide of financial optimism. If you asked most operators, they’d tell you, “We don’t have a bad debt problem.”

But consider for a moment what that means. Thinking that you do not have a bad debt problem does not mean that you do not have bad debt; it means that the bad debt is at a level that your organization finds acceptable. It may not be a problem per se, but in the vast majority of cases, bad debt is an opportunity.

Is Bad Debt a Problem or an Opportunity?

The simple example above shows a regular, mid-priced 300 unit multifamily community. A “normal” level of bad debt is typically in the 2% range, or about $80,000 per year for this property. That may be an acceptable level of bad debt, but it’s still a significant amount of money that should be yours, but isn’t realized. It’s a check that an operator could be writing to investors each month but isn’t.

Yet, time and again, operators leave the opportunity untapped because it “Isn’t a big enough problem.” But should that matter if it’s an easy problem to solve?

How Multifamily Manages Bad Debt Today

There are three levers available to multifamily operators to manage bad debt: 1) screening, 2) deposits and bonds, and 3) collections.

1. Screening – Screening is a vital step in the leasing process, and one that goes some way towards reducing the likelihood of bad debt. But there is a limit to how strict your screening criteria can be. Imagine trying to address the $80k/year of bad debt in the illustration above through tighter screening. The community’s criteria would have to be restrictive to the point of not allowing enough signed leases to fill the community.
2. Deposits – Inevitably, there will be instances where a resident will leave owing debt or having done costly damage to their unit. It is for cases such as these that operators have collected deposits since time immemorial. But what happens when the deposit amount does not cover the damage or the lost rent? That is how the $80k in our example accumulates. Even when surety bonds are offered as an alternative to deposits, they only cover the total amount of the security deposit. And low resident adoption of a bond program leaves many of the community’s leases “protected” by what was meant to be replaced in the first place (security deposits).
3. Collections – Collections can sometimes claw back some of the cost of damages and lost rent, but recovery rates greater than 10% are rare in our industry. And when recoveries are made, they have to be shared with the collections agency. So the impact on bad debt is usually minimal.

Replace Security Deposits & Surety Bonds, Recover Bad Debt

Of the three bad debt levers mentioned above, only one offers the opportunity to recover the $80k in our example. It involves a fundamental rethink of the security deposit. The rethink entails seeing deposits (and surety bonds) for what they really are: a crude form of insurance. Operators collect a large and somewhat arbitrary upfront payment from the resident, then must either return the full deposit amount after move-out (oftentimes including accrued interest) or a reduced deposit amount when things go wrong, depending on any outstanding rent or damage against the leased unit. But when they go wrong, they frequently leave the operator with expenses greater than the deposit, which is why properties using deposits still have bad debt.

The deposit is at the same time large enough to be prohibitively expensive for many renters and still insufficient to cover the losses against which it is meant to protect! And even if a bond is raised higher than the deposit amount, it increases the resident’s cost and offsets the affordability intended.

Here is another way to think about it: when you need to insure against a given outcome, you should do so with an insurance product. We all purchase many types of insurance, and they are usually delivered by companies that specialize in quantifying risk, predicting appropriate levels of coverage and making sure that coverage is accessible through competitive premiums. That is how insurance is supposed to work, and that is how operators should handle the problem they are currently using security deposits and surety bonds to address.

The best way to reduce the $80k in bad debt in our example above is to insure as many leases as possible at the time of leasing the apartment. Instead of asking prospects to scrape together a month’s rent upfront to secure the apartment, or selling surety bonds to each prospective resident, the property can instead insure the lease, which greatly increases coverage, which in turn lowers bad debt.

The property can recoup the insurance cost by offering a deposit waiver product for which the resident pays a modest monthly fee. This arrangement achieves the powerful win-win of affordability for the resident and greatly improved coverage for the owner. And when the vast majority of a community’s leases are insured in this way, that bad debt opportunity is converted into dollars that fall straight to the operator’s bottom line.