Offer Residents an Alternative to Security Deposits
Several years ago, when the apartment market suffered a downturn as home sales soared, multifamily owners and fee management companies learned a hard lesson about rental concessions.
They had freely offered rental concessions, such as low or no security deposits to aggressively market a unit — only to find themselves poorly protected against losses due to damages or lost rent. This trend wreaked havoc with their companies’ net operating income.
Meanwhile during the last three years, the marketing pressures to attract residents and fill units remained, even in the most robust of apartment markets around the country.
But the current state of the apartment market may also be due for a shift. According to the Marcus & Millichap 2007 National Apartment Report (available in PDF format), the pace of rent growth may lose a bit of steam this year as the economy slows and the softening condo market increases rental competition.
Baby Boomers, Active Adults Have Financial Pressures, Too
Baby boomers and active retired adults, too, have their own financial pressures. Retaining their hard-earned money is a priority for these segments of the population.
Many are at the point in their lives when they are facing steep college tuition bills for their children. Many others are learning to live on either smaller or fixed incomes as they cut back on work or retire entirely. For still other pre- and current retirees, the instability of their company-sponsored pension plans creates added financial worry.
Lastly, residents in this age group tend to rent apartments for the longer term — as opposed to one- to two-year leases by Gen Y’ers. As a result, hefty security deposits that equal upwards of one month’s rent or more remain tied up in escrow accounts and unavailable to potential renters — or their apartment owners or management companies.
The Associated Management Company has been offering a security deposit alternative since 2006 at eight communities that are geared toward active retirees in Michigan — where rental rates can be as high as $1,599 for a two-bedroom unit.
“Initially we were skeptical of the need for a security deposit alternative because we believed money is not a big concern to our residents,” said Clio Addington Hanks, senior vice president at Associated Management Company. “Regardless, we decided to offer our senior residents the option at lease signing between the security deposit alternative and paying the traditional security deposit.”
“We found that seniors keep their money in CDs, trusts and other non-liquid vehicles, making it difficult sometimes to come up with the total amount of the traditional security deposit and first month’s rent and still have cash left over for moving expenses,” Hanks said. “As it turned out, reducing their costs upfront with the security deposit alternative was very appealing to these potential renters and has been met with overwhelming success.
“They love the option and are signing up right and left,” Hanks added. “We are so pleased with the program, we are marketing it aggressively in our collateral materials and banners in our leasing offices. It’s part of our closing process now and has resulted in increased sales.”
Roseville, Calif.-based USA Multifamily Management, Inc., a premiere property management firm of senior communities, manages 32 adult living communities that currently offer their senior residents a choice at lease signing between the traditional security deposit and a security deposit alternative.
According to Karen McCurdy, USA Multifamily president, “We started offering our residents the security deposit alternative in 1999 as part of our lease-up initiatives. In response to the program, nearly 95% of our senior residents across all 32 communities opted for the alternative over paying the traditional security deposit, which was equivalent to one month’s rent in most locations.
“Not only do our senior residents appreciate the ability to move in without tying up significant funds for the long term, the program has also has given us a real competitive advantage in a highly competitive marketplace,“ she said.
“Offering the alternative to our prospective residents distinguishes us from other senior communities,” explained McCurdy. “In fact, we envision our use of security deposit alternatives as a long-range initiative by leveraging the program to enhance resident retention, especially in high-rent markets to offset the pain of those rental rates.”
Stuart Litwin is the CEO and a co-founder of SureDeposit, based in Livingston, N.J. SureDeposit is an alternative risk management tool that replaces security deposits with a financial guarantee surety bond. For more information, call Litwin at 800-531-7873, or visit www.suredeposit.com.
Find out more about security deposit alternatives in an expanded version of this article on the 50+ Housing Channel. Readers must be logged in as a 50+ Housing Council member or channel subscriber to access this content.
This article first appeared in the July 27 issue of 50+ Housing e/Source from the NAHB 50+ Housing Council.