Security Deposits vs. Surety Bonds: The Greatest Thing You Never Heard
Ever considered not charging a security deposit?
Probably not. But what if you removed security deposits, as a strategy for securing more prospects for your rental properties, while still having protection against lost rent and property damage? Imagine how you could potentially blow away the competition by doing so. Sound crazy? Landlords in some regions of the U.S. and Canada are increasingly relying on surety bonds in lieu of security deposits.
A surety bond or security bond is a guarantee from a third party company that any unpaid rent and or damages to a rental property will be covered, up to a certain amount. Some landlords mistakenly think of surety bonds as insurance, but experts explain that it is not insurance. Surety bonds are purchased by tenants and are non-refundable alternatives to security deposits, which can often be hefty lump sums.
At a fraction of the cost of security deposits, which can range from 1-3 times the monthly rent, a security bond provides the same protection (up to the amount of the bond). Surety bonds can cost as little as $87.50 or up to $250 or more depending on the rental amount. However, surety bonds do not release a tenant from responsibility if a default on rent or property damage occurs. Representatives from the largest surety bond company in the US, SureDeposit, say if a tenant defaults on the rent or damages a rental property, the bond company pays the landlord but will then pursue the tenant for the payout amount.
Landlords can find many advantages to offering surety bonds as an option:
More Prospects – Sometimes great tenants are driven away from properties with large security deposits because they simply cannot come up with the lump sum often required to sign the lease agreement. This is especially true of landlords requiring two months or more for security deposit. Landlords who offer security bonds as an option have essentially eliminated the number one excuse tenants often have for not even applying in the first place.
Guaranteed Payment – The landlord is guaranteed payment for damages or unpaid rent through the company securing the bond, which may have a higher ceiling than a typical security deposit and can therefore be more likely to cover costs caused by wayward tenants.
No Liability – One of the most common reasons tenants take landlords to court is security deposit disputes. Many states require special escrow accounts be set up to hold tenant security deposits, and that unreasonably high interest be paid to the tenant on the deposit. Landlords who give tenants the option of having security bonds rid themselves of this liability.
No Accounting – Landlords are not only held liable for holding tenant security deposits in trust accounts, but also for keeping account of what expenses, if any, are taken out at the end of lease term. Landlords are required to return the deposit or provide an accounting of expenses within a specified period (usually 30-45 days) or face penalties of up to three times the amount of the original deposit. Landlords often do not want to deal with this accounting for every penny and rigid time constraints, but know they have to do so because it’s the law. Again, allowing surety bonds is a nice way of alleviating this headache as well.
There are a number of reasons why tenants might enjoy the option of a surety bond as well. The most obvious reason is the surety bond costs significantly less than the amount usually required for a security deposit. But the lack of a security deposit also serves as a deterrent for moving out of the rental property: they will likely need to come up with a full security deposit to move into their next property, but will not be receiving any money back from the current landlord. Further, tenants will be less likely to leave in default and cross a large bond company with an in-house collection agency, compared to Joe Shmoe landlord with little reach or ability to collect debts.
While security bonds are a viable option to security deposits and can benefit landlords in many ways, it is not for everyone. Surety bonds are not offered in all states or Canadian provinces, and as usual, smart landlords should perform due diligence by researching the companies offering alternatives to security deposits. Some companies only service property managers with 100 units or more, while others will work with private landlords with only a few properties.
In some states and provinces, landlords can charge a full or partial security deposit along with the security bond. There is no U.S. state or Canadian province where landlords can force tenants to purchase security bonds as a condition of the rental agreement. Landlords are encouraged to research any local restrictions on security bonds as well.
Have you ever known anyone to accept surety bonds as alternatives to security deposits? Would you consider it? Share this article with a colleague or friend who may benefit from changing their security deposit policies.