Does the cash put in escrow ever really cover the turnover required for a unit?   Do pooled security bonds cover move-out or eviction costs?   Are security deposits worth less than money in the bank?

If you answered yes to any of these questions, it may be time to re-think (not eliminate) the role of security deposits in your lease acceptance terms.  Let’s divide the conversation between applicants accepted outright and those accepted with conditions based on credit:

1. Applicants Accepted Without Conditions – These are your good credit renters who have money in the bank, solid rent-to-income ratios, and a credit score to write home about.  Security deposits with this group are standard operating procedure in that these financially savvy renters understand the community having funds at the end of the lease to cover minor incidental costs when moving out like a lost key. These renters expect, and normally receive, most if not all their security deposits back because they fulfill their lease obligations.  With this in mind, many companies provide surety bond options for the good credit renters who they don’t expect to turn into skips or cause major damage. 
2. Applicants Accepted With Conditions Based on Credit – These are your less than perfect credit renters, often those who present with a sub-prime credit score (<680) that signals the need to put safeguards in place.  Security deposits for this group assume at the get go that a percentage of this resident population will go belly up.  Ironically, the applicant pool that needs the most help is also often the applicant pool that is most price sensitive and will shop around for the lowest move-in costs.  As such, contrary to design, this is the applicant pool that move-in specials often attract.  Offering a surety product to this group as a substitute to higher cash deposits is often mistaken as a way to protect communities against future loss.  With a focus on recovery through pooled funds, lower cost move-ins do nothing to empower residents to perform throughout a lease. Of equal importance the forfeiture of the surety cost is so minimal that it does not cover the cost of a skip or eviction.  A few unexpected move-outs can substantially reduce the amounts of funds in the pool leaving the community with no protection.

To determine if security deposits are performing as you want them to at your communities, consider alternatives that factor in these points:

-        The demographic profile for your renter population based on a variety of factors specific to the locale of your communities, including  job growth and business development, housing competition, and market rate rent history

-        Historic view of renter performance by sub-market 

-        Payment performance analysis for all segments of your resident population for the past 12-24 months, including cost analysis of skips, evictions and turnovers

All of these factors point to the need to identify options you can offer to applicants to help them perform reliably throughout a lease instead of worrying about having enough money in place to cover losses when your security deposits don’t provide the security you hoped they would.