Renters looking to secure a lease know that they’ll probably need to pony up a little money upfront. There may be an application fee, a broker’s fee, and the cost to move you and your stuff if you hire help.
In addition, many landlords require a security deposit to help cover costs should their new tenants cause any damage or other issues. But there’s a new alternative to the traditional deposit that’s growing in popularity: the surety bond. In the short term, a bond is probably cheaper than paying a security deposit. But in the long run … it might not be the best option.
What is a surety bond?
A surety bond is a fairly new tool that can allow renters to pay a one-time fee in lieu of a security deposit. The bond is usually less money than a deposit, which may allow renters to sign a lease on an apartment they may otherwise not have the cash to get into.
“The primary purpose of this is to reduce a deposit that is unaffordable … or for a tenant that has documentation issues or credit issues where an owner is looking for an unusually high deposit,” explains Bruce Ailion, a real estate agent and attorney in Atlanta. In another scenario, Ailion says, an owner with an in-demand property who can command a larger deposit may offer potential tenants the option to pay via bond.
With these bonds, your money goes to the bond company — not to the landlord. The bond company then promises to compensate the landlord for the value of the deposit the landlord would have collected and sometimes even promises to cover the cost of any damages you might leave behind when you move out.
What you need to know
While at first glance this can seem like a great solution for a renter, security deposit alternatives aren’t necessarily a smart choice. With a surety bond, you will not get your money back when you move out — even if you didn’t cause any damage and left your place in great condition.
That’s because the bond is a fee, not a deposit. With a security deposit, there’s a chance you’ll receive it back in part or in full. With a bond, even though the upfront amount you part with may be less, you don’t get it back under any circumstances. The bond also typically covers only a set amount of time, which may cause issues if you plan to live in your rented home for an extended period.
Plus, you may even have to reimburse the bond company if you do cause damage to your apartment, or if you have any unpaid rent in your name. And you have very little recourse if you and your landlord disagree on the damages and the cost to fix them.
Proceed with caution
Opting for a bond could also put your credit at risk, says Crystal Stranger, EA and president of 1st Tax.
“I would think that the bond companies would be much more likely to file against your credit or go into a collection process if there is damage,” she says. “Having a third party involved just complicates everything much more than dealing directly with a landlord or property manager.”
Have you chosen to pay a surety bond instead of a security deposit? Would you do it again? Share your tips and experiences in the comments below!
