The Security Deposit Dilemma

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If you’ve been in the multifamily industry long enough, you’ve seen security deposit policies change dramatically over the past 25 years. Historically, the benchmark deposit amount was a full month’s rent, but owners and operators ultimately had to rethink their approach to risk management and asset protection because it was not serving the intended purpose. Most residents received their deposits back at move-out, while those that caused damages exceeded the coverage of one month’s rent.  As a result, a security deposit dilemma materialized in many areas of the country. To fully appreciate the evolution of this important part of leasing, we need to step back and examine traditional cash deposits and their shortcomings.

Security deposits have been a standard lease component for decades. This tangible method of asset protection was the primary method of lease enforcement and provided immediate recourse when a resident did not satisfy the terms of their lease. The traditional cash deposit was also thought to drive behavior change since the renter had "skin in the game," compelling them to keep an apartment in good condition in order to receive their deposit back at move-out. Deposit amounts are often dictated by strong or soft markets as well as by state law. Managers in strong markets might hit a ceiling of coverage when limited by how much they can legally require. Conversely, managers that lower security deposits in weak markets to attract new renters take on more risk for the sake of remaining competitive.

The problems that arise from such responses to market conditions include not having adequate security deposits to cover damages and lost leases when good candidates go down the block for a better deal. And without thorough understanding of the true outcome of deposit manipulations a company could find itself in the red for years to come. Since lower deposits can lead to greater loss and higher deposits to increased vacancy, this deposit predicament put many communities in unstable and unsustainable situations.

So where are we today? New companies emerged to introduce an alternative to the old-fashioned cash security deposit that is quickly gaining momentum in the industry.  Offering a blend of technology, value and efficiency — security deposit alternatives seek to address inconsistent and insufficient cash deposit policies, improve community-wide coverage and reduce the upfront cost of move-in for a renter. Moreover, operators who adopt these alternatives are equipping themselves with a flexible tool that allows them to be competitive at move-in while bolstering risk management strategies across their portfolios. Leasing offices that have implemented such technology can save both time and money while benefiting from the improved ease of use these newer programs deliver.

Where are we headed with respect to deposits and the alternatives? Looking to the past can help us come to a conclusion about the future. The industry witnessed a similar trend with resident screening when it evolved from manually evaluated credit reports to tech-driven systems that delivered instant, more accurate results. An instant screening result was a huge benefit for renters who were eager to move-in and operators who were eager to fill vacancies. Early adopters enjoyed a competitive advantage over other companies that failed to realize the sudden obsolescence of their screening methodology.

Fast forward to today — most operators use an automated resident screening service that provides immediate results. With the resident screening software phenomenon in mind, it seems the trend in favor of security deposit alternatives is one that will certainly continue. The latest versions of these programs are being embraced more and more for the same reasons with the results being — once again — that the late adopters lose a competitive edge while they play catch up. As new products come to market it is always wise to take time to learn about them and understand how they can improve business processes and earnings, potentially giving you a powerful operational tool.

Jon Hayford is the Operations Manager for DepositIQ. He is also a Product Service Council Member for the Florida Apartment Association. Available nationwide, the security deposit alternative product is designed to work with all types of properties including market rate, student, affordable, militar, and senior housing. Visit www.depositiq.com for more information.