Is it better to offer a traditional security deposit or to opt out entirely?

That’s a question many property management companies ask as they consider forgoing tradition for seemingly seamless solutions. And it doesn’t come as a surprise. From collecting and refunding deposits to managing accounts to handling state-by-state regulations, deposits are often difficult for property managers and hard on residents. However, not offering a deposit leaves PMCs (property management companies) open to risk and limits their protection. For example, once a resident moves out, PMCs are left with costly damages that can be difficult to resolve.

So how can PMCs transition deposits from being a liability to becoming a real asset? It starts by comparing how the alternatives impact risk exposure and occupancy, and discovering what removes the complexity of deposits.

Eliminating Deposits

Move-In Fees
To help increase occupancy rates, PMCs drop deposits in favor of nonrefundable fees to cover the basic costs of unit upkeep (painting, cleaning, etc.). It helps prospects move in faster by limiting their financial burden and instead shifts that burden to PMCs later in the tenant lifecycle. The fees often aren’t enough to cover any outstanding balances, additional damages or potentially unpaid rent payments.

Monthly Premiums
Charging a resident a monthly premium through an insurance-type product or direct billing authorization can cover potential damages. This option essentially eliminates the security deposit and helps companies avoid the complexities of state-by-state regulations. But if a resident breaks their lease or moves out of state with an outstanding balance, PMCs are left with the debt. While the regulatory burdens are partially lifted, so is the protection to their bottom line.

The Deposit Alternatives

Lease Guarantees
Third-party guarantor or cosigner solutions reduce upfront costs for residents and help PMCs if there are missed rent payments. These types of solutions lower the barrier of entry, increasing your applicant pool, much like move-in fees. But they’re difficult to qualify for and can often lead to high premiums for residents.

Surety Bonds
Like other alternatives, surety bonds lower the cost of moving for residents. Based on actual claims data, surety bonds cover PMCs’ risks. With a bond, residents pay a small one-time fee, giving PMCs the flexibility to lower upfront costs without sacrificing their coverage. Finding a partner that integrates collections and guarantees coverage without pooling funds will ensure PMCs have what they need with less administrative hassles.

Financial Technology
Although security deposits come with a variety of complexities, having the cash on hand for future issues easily mitigates risk. Recent innovations have created a new way of making security deposits easy to manage by introducing financial technology to PMCs. A digital platform allows PMCs to maintain their security deposits without the hassles of paying interest or handling regulations. For residents, it can create clarity around what their deposit is used for, helping to eliminate disputes.

As the industry begins to rethink security deposits, it’s important to understand which alternatives expose you to risk and which ones help cover (and cut) costs.