Sick of Dealing with Security Deposits?

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

• 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.

• 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.

• 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.

• 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.