let’s talk: SURETY BONDS vs SECURITY DEPOSITS
Last week my business partners and I were discussing the application process for one of our Binghamton rentals. When we were putting our rental package together, the group discussed the notion of using surety bonds vs security deposits. I had honestly never heard of a surety bond before so I did some digging.
So, as we do, let’s talk Real Estate, let’s talk SURETY BONDS vs SECURITY DEPOSITS…
First things first, WHAT IS A SURETY BOND?
A surety bond is a three-party agreement that binds the tenant, a surety company, and the landlord together. The tenant purchases a bond (insurance plan) that states that they will act in accordance with the lease. If they do not, the landlord can file a claim against the bond for payment. Surety bonds are often used as an alternative to a security deposit.
HOW DO THEY WORK?
(1) Tenant purchase a surety bond (typically 1%-4% of total insured amount).
(2) Surety Bond/Insurance Provider + Tenant + Landlord sign a contract that states if the tenant does anything to violate the lease, the landlord can make a claim against the surety bond.
(3-if needed) If a claim is filed, the surety bond provider would pay the landlord, and then look to the tenant to collect the balance owed.
LET’S DO A REAL LIFE EXAMPLE
Security Deposit: $800
Surety Bond for $800 Deposit: $32
Tenant violates the lease by leaving the unit trashed. The landlord seeks repayment from the surety bond provider for $800.
The surety bond provider pays the landlord $800.
The surety bond provider then reaches out to the tenant to collect the $800.
In the end, the tenant would be out $832 for this claim. If they had paid a the traditional security deposit, they would only be out $800.
PROS OF USING A SURETY BOND
For the landlord….
- With lower move-in costs, the landlord is able to increase their applicant pool. Requiring a tenant to have a ton of cash upfront to move-in can potentially deter or eliminate good candidates.
- Landlord does not have to argue with the tenant regarding lease violations. Everything is negotiated through the bond provider.
For the tenant…
- Less money required upfront. Typical surety bond costs 1%-4% of total bond amount.
CONS OF USING A SURETY BOND
For the landlord….
- Having to file a claim to seek coverage for damages. If you collect a security deposit, you already have the cash.
For the tenant…
- Cost of bond is non-refundable
- Tenant could end up spending more money in the end. See example noted above.
- What if the landlord taps the bond for repairs that you don’t agree with? Or, repairs that are not justified based on your time living there? You would not able to negate those claims with the landlord directly. You would have to go to mediation or court.
My takeaway from all of this is that I plan to advise my tenants to pay the security deposit vs purchasing the bond (if they can). The only one who seems like they could potentially lose out on this deal is the tenant. Obviously there are always certain circumstances that may make the surety bond more attractive for the tenant however, it seems safer, and cheaper (in the long run), for all parties to go the security deposit route! I am curious though, are there any landlords on here that allow or even require their tenants to purchase a surety bond?! Let us know your thoughts!
p.s. thank you to my business partner JF for the inspiration for this week’s post!
Happy Wednesday! & Stay Healthy!
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