The security deposit gets a makeover
The tradition of paying a month's rent (or more) into a landlord's escrow account is being challenged by young companies that offer alternatives to the cash security deposit.
Why it matters: There's a lot of money at stake: An estimated $45 billion sits in security deposit accounts. And while the current system has its flaws, the alternatives also have pluses and minuses.
- They're selling products like surety bonds, insurance policies and rent guarantees, and charging tenants nonrefundable monthly fees — typically $10-$30 — instead of a refundable upfront lump sum.
- Critics say tenants can wind up paying a lot more than they would with a refundable security deposit, and that the products don't always offer the same protections.
- While the pitch is to renters, the companies are working for the landlords, and it's not always clear who takes the lead in resolving disputes.
Driving the news: A legislative movement called "Renters Choice" is pressing cities and states to loosen laws around security deposits to give greater leeway to the new products, which are known collectively as "security deposit replacements," or SDRs.
- So far, Cincinnati and Atlanta have passed the first two laws.
How it works: Companies like SureDeposit, TheGuarantors, Rhino, LeaseLock and Obligo are busy signing up property owners; each of them has a different system.
- They're not necessarily aimed at people who can't scrounge up a deposit, but rather at people who'd prefer to use their money elsewhere or don't trust their landlord to return it.
Rhino, an insurance broker, offers a new product it calls "security deposit insurance."
- "It's insurance that the renter purchases for the landlord's benefit, in case there's unpaid rent or damages," Paraag Sarva, Rhino's CEO, tells Axios.
- A tenant whose rent is $3,000 a month, for example, would pay a monthly fee of $20 or so for a policy that would pay the landlord as much as $3,000 if there were problems when the tenant moved out.
- If there's more than $3,000 of damages or unpaid rent, the tenant is billed by Rhino.
- It's different from the traditional renter's insurance, which typically covers tens of thousands in damages after the tenant pays a deductible.
"Collecting cash and putting it into escrow accounts and then returning it when you don’t even have to use it adds complexity and costs," says Sarva, adding that landlords often have trouble tracking down tenants to return the security deposit after they move out.
Another company, Obligo, offers tenant management software for property owners. Tenants get the choice of paying a security deposit or a nonrefundable fee in the neighborhood of $13 a month.
- Tenants who don't pay a security deposit also give the landlord preauthorization to charge their bank account for an amount up to the deposit, though no funds are held or restricted.
- "You agree to pay the deposit if you need to — you just don’t do it in advance," Roey Dor, CEO of Obligo, explained to Axios.
- The inspiration, he said, came from "when you check into a hotel, you swipe your card to provide a preauthorization in lieu of a cash deposit."
- Obligo doesn't handle arbitration but does present tenants with their legal rights if and when necessary.
What they're saying: Eliminating the security deposit "helps convert people into leases that they wouldn't otherwise be able to get into," says Derek Merrill, CEO of LeaseLock.
The other side: Tenant advocates point out that security deposits — while imperfect — come with a raft of legal protections.
- "A lot of tenants are better off paying a traditional security deposit because that’s a refundable payment," says Eric Dunn, director of litigation at the National Housing Law Project, which published an article on the pros and cons of the new products.
- "They’re basically exchanging a refundable payment for a nonrefundable one."
The bottom line: Despite the pitfalls, the alternative systems are likely to take greater hold, removing barriers to people renting.
- "This is real and here to stay, and the new way that renting is going to take place," says Sarva.
Editor's note: This story was originally published on May 25.