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Sick of Dealing with Security Deposits?

Surety bonds are the little-known option that could help

As a landlord or as a tenant, security deposits can present inconvenient hurdles to entering into a written lease agreement. Landlords want to protect their property by ensuring payment for potential future damages, but also a good relationship with their tenants, with little hassle or administrative burden. A tenant also wants this, but may find it challenging to come up with three months’ worth of rent at the same time as incurring moving expenses. Particularly in situations where a landlord and tenant engage regularly with each other, such as an owner-occupied duplex, or a landlord with only a small number of rental properties, there may be incentive to explore creative solutions.

 
One option available in many states is a surety bond. A traditional security deposit is a sum of money provided to the landlord upon taking possession of rental property. The landlord must retain this money for the length of the lease (often in a separate, interest-bearing account) and refund it, less documented damages or outstanding rental payments owed, at the end of the lease term. A surety bond, on the other hand, is a guarantee to the landlord by a third party, for which the renter pays a fee. Usually, the renter will pay a fraction of the full amount of the security deposit (17.5 percent is a common rate). The surety bond company agrees to cover what is owed to the landlord, if anything, at the end of the lease. If there are damages to be paid or unpaid rent owed, the landlord will collect from the surety bond company, and the surety bond company will charge the renter.
 

Risks and Benefits

For a Renter, upsides include:
  • Not having to come up with as much cash at the time of move in.
  • For renters who regularly pay rent, give proper notice before moving, and cause no damage to the property, they will likely owe no additional money at the end of the lease.
  • For those who are money-savvy, the investment return on money otherwise tied up in a security deposit potentially can outpace the cost of the surety bond.
  • This could be a tool to rein in landlords who retain tenant security deposits in bad faith as a matter of practice. A landlord would have to document damages and collect for them, rather than simply keep money already in their possession.

For a Renter, negatives include:

  • Paying a nonrefundable fee that covers no part of what may end up being charged at the end of a lease.
  • Fees, while less than a full security deposit, can nonetheless amount to several hundreds of dollars.
  • If the surety bond company is not able to receive payment due from a renter, the renter may be liable for collection costs and attorney’s fees.
  • Surety bonds operate for a fixed period of time, usually five years, then expire, whereas a security deposit will last indefinitely.

For a landlord, upsides include:

  • Not having to manage and track security deposit funds, often in accordance with strict statutory requirements.
  • Knowing that payment of any damages or rent due at the end of the lease will be assured, up to the deposit amount. Collection from the tenant is the surety bond company’s responsibility, not the landlord’s.
  • Flexibility to work with a desired new tenant while also protecting investment.
  • In some cases, there may be a percentage of the tenant’s fee shared with the landlord for using the surety bond company’s services, which carries no obligations.

For a landlord, negatives include:

  • Knowing a tenant can come up with a security deposit can serve as assurance that they will also be able to pay their rent; evidence of their inability to do so might raise concerns.
  • To the extent that a tenant is incentivized by return of their deposit, they may feel less motivated to care for the property.
Use of a surety bond in lieu of a security deposit may be a common practice in some areas, yet unfamiliar in others. Certain surety bond companies may not provide bonds for this purpose, but there are some national providers that market these services. If you are either a property owner or a tenant thinking you’d like to pursue this choice, talk to a landlord/tenant attorney in your area dor legal advice and to see if it’s an option in your state. For more information on this area, check out our overview of real estate and landlord-tenant laws.

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