Beware of security deposit alternative

Rent it Right

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Oct. 14, 2010

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Rent it Right

Janet Portman
Inman News

Q: The rental property I'm thinking of living in has offered me an alternative to a security deposit. I pay for a bond, whose premium is less than a full security deposit, but even if I leave owing no rent and no damage, I don't get the money back! Isn't this a violation of the security deposit law? --Jake W.

A: Your landlord has signed up for a new alternative to the tried-and-true practice of requiring a refundable deposit from renters. As you know, classic deposits are just that -- money that's returned to the tenants as long as they leave the rental undamaged and have paid all of their rent.

But not all innovations are improvements. And from the tenant's perspective, it's not hard to see what's wrong with this new model: You never get your money (the price of the bond) back, even if you've paid all your rent and leave the place as spotless as an operating theater.

In addition, if you do leave damage or unpaid rent, you'll have to reimburse the bonding company for whatever money they had to fork over to the landlord to cover those sums.

It's easy to see why landlords love this arrangement. They don't have to haggle with tenants over deductions -- they simply submit their expenses to the bonding company and get paid. They can advertise "No Security Deposit," though they might be wise to add "Bonding Fee Required." The messy business of accounting for deposits and refunding balances is off their list, too.

But is this brave new process legal? In states that tightly regulate the collection and use of all fees, maybe not. Some states (including California, Hawaii and Montana) insist that all fees be refundable.

In others (such as Arizona and Utah), nonrefundable fees must be specified as such in writing; otherwise, they're refundable. In these states, collecting the bonding fee might violate the rules, even though the bonding company -- not the landlord -- is doing the collecting.

The marketing glitz used by the bonding companies reminds me of payday loan advertisements. They're both about having money available to you now.

The bonding companies tout the advantages of not having to pay a full deposit ("You'll have money for furniture, a bigger apartment, a health club membership!"), but buried in the FAQs is the unpleasant news that later on, you will be billed for any unpaid rent or damage.

And even if you leave without any deductions, not everyone will be thrilled at avoiding the deposit in exchange for losing the premium, especially if the deposit wouldn't cost much more than the premium amount.

Perhaps the most troubling aspect of this scheme is your inability to deal directly with the landlord if you don't agree with his use of the bond.

For example, what if you learn, after you leave, that the landlord has tapped the bond for repairs that you claim were not justified or for rent that you already paid?

Normally, you'd contest the landlord's use of your deposit in a small claims court lawsuit. How do you fight it out when it's the bonding company, not the landlord, who is demanding that you reimburse them? If you don't pay up, presumably they will sue you, and that puts you immediately at a disadvantage.

Depending on the fine print in the bonding agreement, you might have to show up at a courthouse that's convenient to them, for example, or submit the matter to binding arbitration.

In short, there's much to be wary of with such an offer. If you can afford it, offer to pay a normal security deposit. You'll be assured that the sum should be returned to you if you leave without damage or unpaid rent; and you'll know that you can challenge the landlord directly if the deposit isn't returned fairly.

Q: We own and manage a midsize multifamily apartment building, and have noticed a curious rise in the number of applicants with very thin credit. We're also seeing a lot of medical debt. Normally, we'd be wary of renting to these prospects, especially the ones without a proven credit record. But in these economic times, I'm not sure the old rules still apply. --Jason S.

A: You're not alone in noticing that credit profiles for tenants have changed over the past couple of years. Bankruptcies are on the rise, credit is harder to obtain, and consumers facing large and competing medical and other essential living expenses have often been forced to choose which bills they can afford to pay.

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