According to a study of nationwide rents by Novato, Calif.-based data specialist RealFacts, rents and occupancy declined in nearly every market in the country between September and December of 2008, suggesting that renters looking for an apartment this year will have more choices and may get a better value for their rent money.
While this scenario might bode well for those apartment seekers looking to lease an apartment, owners and managers are faced with increased exposure to losses and bad debt when they lower security deposits to keep up with the competition.
A surety bond from Livingston, New Jersey-based SureDeposit attracts and retains renters while protecting owners from bad debt, says David Williamson, national marketing director for SureDeposit, which has been offering its security deposit alternative to apartment owners and managers for almost a decade.
The company was launched in 2000 by CEO Stuart Litwin and CFO Dan Rudd, both of whom came from a multifamily background. Litwin’s family owned a laundry business that operated more than 40,000 laundry machines in apartment communities in six Mid-Atlantic and Northeastern states. Rudd was a real estate owner and investor, specializing in value-added apartment acquisitions.
The pair discovered the surety bond concept, which originated at Florida-based Bankers Insurance Group as a way to help mitigate risk in the rental industry, and bought the rights from the underwriter.
They changed the name to SureDeposit and began to market the product to apartment owners and managers.
“When we first began, we came up against many closed minds and doors,” said Williamson, who joined SureDeposit eight years ago. “We have since become the only accepted alternative to security deposits in the nation,” he added. SureDeposit has more than 1.5 million units in nearly 3,500 communities across the country under agreement today.
“Our program allows management companies to remain competitive. One of the greatest things we have been able to do is allow them to get away from that crazy low-deposit game,” he said.
Good choice
The program works like this: At lease-signing, new renters may choose to pay a one-time, non-refundable premium to purchase a surety bond from SureDeposit instead of paying a conventional refundable security deposit, which can be one month’s rent or more in good times and strong markets.
Rather than float a security deposit for the life of the lease, renters can buy a surety bond for a fraction of the cost. Bond amounts are offered in $250 increments and the premium the renter pays is always 17.5 percent.
“It makes the conversation about move-in funds much more palatable to the resident. When we can offer them the option of either paying us $87.50 for a non-refundable performance bond or laying out $500 in cold hard cash, 95 to 98 percent of potential renters take the $87.50 in a heartbeat,” said John Eifler, VP of Marquette Management, the fee management arm of the 25-year-old Marquette Companies, a full-service real estate company that focuses only on multifamily.
Marquette’s management portfolio consists of 9,000 mostly Class A and B apartment units in Illinois, Indiana, Michigan and Missouri, 25 percent owned and managed by Marquette and 65 percent fee-managed for institutional and pension fund clients.
Marquette began offering SureDeposit’s surety bond alternative to renters during the market downturn of 2002, attracted by the opportunity to provide residents with a lower-cost alternative to the very low security deposits many of the company’s competitors were using to reel in new renters.
“That was making it difficult for us to compete. It costs a fair amount of money to take in a security deposit, maintain it properly according to state and local rules and regulations and laws and also to return it properly. It probably costs $100 to maintain each security deposit account, so it got to be frustrating to spend that much time and effort to take care of such a small amount of money and then have someone move out potentially owing us some rent and maybe some damages and not having the financial wherewithal to cover those losses for our owners,” said Eifler.
So, when SureDeposit came along, Marquette took a hard look. “We saw that we’d get $500 of coverage in the event someone left owing us money or damages and we would not have the burden of maintaining and collecting security deposits,” he said of the program that has helped boost and maintain occupancy across Marquette’s managed portfolio, especially in markets where the company’s competitors do not offer the SureDeposit alternative.
Marquette also leveraged the program on lease renewals, offering residents the opportunity to replace their security deposit with a performance bond. “When we rolled out the program, and even now in some cases, we’d go to them on renewal and say, for instance, ‘Would you like your $500 back? You can replace it with a $500 performance bond for $87.50.’ People love to have their cash back. That helps our renewal process and encourages many residents to renew their leases and have a little extra cash bonus in their pockets. Yet ownership still has some reasonable protection if that person were to leave us down the line owing us any funds,” said Eifler.
User friendly
SureDeposit provides training, marketing materials and customer support to clients, making it easy for clients to set up and maintain the program. “SureDeposit has an extremely high level of customer service. They offer online training and their regional people will come to your property to train new or existing staff,” said Eifler.
The program also reduces many of the administrative time and costs associated with the security deposit, leaving on-site staff free to manage their properties.
“With SureDeposit we don’t have to collect security deposits, have a separate bank account for them or, as is required in many states, pay interest on them that has to be calculated. Interest calculations on security deposits vary from state to state and sometimes county to county and then that interest has to be paid out, many times not at the end of the lease, but as the lease proceeds along. At the end of the first year of residency in the Chicagoland area, for instance, you have to pay interest at the end of the lease term and if it is very low, you could be writing a check for $1.32. And then you have to mail it and you can’t be late because there are penalties for being late,” said Eifler.
High performance
SureDeposit is not an insurance policy. It is a performance guarantee, similar to a contractor’s bond, protecting a property against financial losses resulting from lease violations, according to the terms of a renter’s signed lease agreement. The bond covers the renter for the entire time they lease at the community and, like a security deposit, can be transferred to another community within an owner’s portfolio.
If a renter meets all terms of the lease agreement and leaves the apartment in good condition without owing any money, he or she is under no further obligation to the apartment manager. But if they fail to meet their obligations, renters are required to reimburse SureDeposit for the amount owed of their rental and financial obligations.
And, if damage or rent loss does occur, the apartment manager simply files a claim with the surety for reimbursement of the debt amount up to the coverage limit. The surety then pays the owner/manager’s claim from the bond premiums, minus a fee to administer the program, which SureDeposit has pooled for the owner/manager’s sole use.
“SureDeposit establishes and manages individual claims accounts for each of its clients, depositing 60 percent of all the renter premiums into the account that is managed and held by one of our two underwriters, Fidelity National Property and Casualty and Bankers Insurance Group. The funds grow in an interest bearing money market account and, when a claim is made, we go to the fund to reimburse the claim up to the coverage amount, then send it out to the collection agencies we have contracts with. Whatever they are successful in collecting, minus their fee, is deposited into our clients’ claims account. We handle this whole back-end service for our clients, which significantly reduces their administration costs,” said Williamson.
Bottom line boost
The speed with which claims are reimbursed is a key benefit to owners and managers. An approved claim is paid within 20 days. “It’s very fast. If someone moves out owing me $500, all I do is go online and post a request to SureDeposit and they send me my check. I don’t have to wait two months. It’s very easy to get money out of the pool. And, with 90 to 95 percent of our residents utilizing the program, we have collected a much higher percentage of our losses through this process,” said Eifler.
A recent performance review over the course of Marquette’s program with SureDeposit revealed that the company collected close to $1 million, or $500,000 more than it would have using its previous collection methods.
Eifler said SureDeposit works best when a majority of renters are on the program. “The idea is to build up your premium pools. It takes a little time, but when you get a high percentage of renters taking part in the program, the pool builds up quickly. That’s always the big question new managers entering the program have. They ask, “If I sign up today and someone buys a bond, and I’ve only put one person in the program and that person moves out owing money, will it be difficult to get my money back on that deal?’ Over a period of time – six, eight months – you’re going to have sufficient money in your pool if you are on the program correctly,” said Eifler.
But he advises managers not to make the mistake of lowering their credit requirement standards to boost occupancy, just because they can offer the surety bond. “We don’t have a large number of skips, evictions and damages because we still screen well on the front end,” he said.
Attracting better renters
SureDeposit integrates with a number of national resident screening and collection companies, and applicants become eligible for SureDeposit the moment they are approved. “Some screening agencies, like ResidentData, have added an icon on the screening Web site that says, ‘submit a SureDeposit form’ and all the leasing agent does is click on it and our bond form pops up in PDF form,” said Williamson.
According to a 2005 study conducted by Joshua Tree Consulting, which examined the value of replacing conventional security deposits with SureDeposit’s alternative surety bond program, multifamily owners and managers who offer their residents the SureDeposit program are better able to rein in bad debt resulting from damages or skipped rent and improve their cash flow.
Using data provided by a resident screening company about SureDeposit’s renters and the overall renter population in five states, Joshua Tree Consulting found that 79 percent of SureDeposit renters fell into the screening company’s two highest credit quality classifications compared to just 65 percent of the general pool of renters in those states.
ResidentCheck, which formed a strategic alliance with SureDeposit in 2002, noted this trend a couple of years later, reporting that collections from former residents who had paid the one-time surety bond fee were 27 percent higher than those from former renters who chose the traditional security deposit option.
“We have consistently seen a link between the security deposit alternative and our ability to improve collections for our mutual multifamily clients,” said ResidentCheck President Jorge Baldor.
SureDeposit currently operates in every state except New York, but Williamson believes the company will be doing business in that state soon, as well. “We have become an accepted and popular alternative to security deposits in the apartment industry. We are now an addendum to the National Apartment Association’s standard lease agreement,” said Williamson.
