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Brent Williams' Apartment Blog

Thoughts, comments, and ideas about the overall multifamily industry, as well as a property-specific focus on resident retention and apartment marketing.

Can the Security Deposit Convert Into Additional Income?

Note:  This is a conceptual blog that does not account for legal ramifications – please seek legal advice before implementing.

Many a shady landlord have tried to unfairly keep security deposits from their residents moving out, which is not only unethical and illegal, but also a guaranteed route to negative ratings and bad word of mouth.  But what if that money could be used for the benefit of the resident, as well as be a profit generator for the community?

Ryan Green recently wrote about making the resident move-out experience a positive one, and one of his suggestions was essentially offering cleaning services to residents as a hassle-free option as they move out, allowing them to “pay” for the cleaning using part of their security deposit.  Not only is that a beautifully elegant way to provide value and ensure a clean apartment, but it also uses already spent money.  By allowing residents to use their security deposit, there is no additional cash outlay for that resident.  On the opposite side of the transaction, the community can either have its own housekeeping staff provide the service, or pay a 3rd party at a negotiated lower rate, thus earning the difference between the supplier cost and the amount charged to the resident.  Either way, a portion of that former security deposit gets converted into income.

In this way, we stop seeing the deposit as money that is “stuck”, but rather money that can potentially be used on transactions.  And if those transactions can be flowed through the community in some fashion, like in the cleaning example, the community can reap the financial rewards.  And to give us a sense of “scope”, if a community collects an average of one month rent for a security deposit, it is not unreasonable to estimate $300,000 in potential transactions tied up in a community of 300 units.

There are two inherent risks/challenges with this concept.  The first is that the security deposit exists for a reason, to secure against damages or lost rent.  But here is where this particular circumstance works in our favor:  the resident is moving out.  So in that process, we can do a pre-walkthrough of the unit to get a feel for possible damages.  Even though not all damages are obvious or visible during this type of walkthrough, it will lessen the risk that there is significant damage that the deposit would have been required for.  Plus, as the resident is moving out, they have likely already paid their last month rent, which limits the risk of non-payment of rent.  In other words, the security deposit has already “done its job” in a sense at this stage.

The second issue is simply finding the other offerings the community could provide.  The cleaning example is a pretty straight forward concept where the community either already provides that service itself with its own staff, or it already has a supplier lined up for that purpose.  Either way, it is easy to take the existing security deposit and apply it to that cost.  But what other services and products make sense in this case?  Since the resident is moving out, they probably need moving supplies, moving truck rental, storage facilities, and maybe new utility providers.  Maybe they also want new furniture, rented or purchased.  This works for everybody – the resident gets to use his or her security deposit immediately for these current expenses, and the community negotiates a referral fee for every transaction. 

The real challenge with this concept, however, is the logistics in the transaction.  The community would need a relationship with the providers with stated referral fee, and then make the purchase on behalf of the resident.  It could get pretty tricky.  There is a good chance that this concept would need to be implemented by either a large property management company or by a 3rd party provider who lined up the process from end to end.

Regardless, security deposits will ultimately be spent by the resident, but if those transactions could be funneled through the community before the resident moves out, it could mean significant opportunities for ancillary income. 

What do you think?

Brent Williams is Chief Insider of Multifamily Insiders.  You can connect with him on LinkedIn or on Google+.

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This comment was minimized by the moderator on the site

great idea! would be hard to make happen, but still great thoughts! Would love to see something along the lines of this. I think the cleaning one could be easy to do and I know a lot of people would love it!

  Travis Cox
This comment was minimized by the moderator on the site

The lease at one of my communities I inherited had a clause in it specifying Resident was responsible for ensuring the carpet was clean upon move out. Either the resident could have this charge deducted from the security deposit or they could produce a receipt from a reputable carpet cleaning professional service provider. We almost always took this charge from their security deposits. With between 50-65% of the property turning over at that time, we recouped between $5500-7500 annually. Once you reduce your overall turnover, this figure is lessened but it was still significant. Now, I do offer the Resident the option to pay for cleaning and carpet cleaning upon move out. I do this mostly because I was becoming very discouraged that so many of our well-to-do Residents felt it was beneath them to do the work themselves and I was ending up deducting the charges anyway. I felt like maybe this was less insulting to both parties.

  Mindy Sharp
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This is an excellent idea. I have been doing it for the past 7 years! In those 7 years I have had more residents opt for us to take it out of their deposit than doing it on their own. I give them an option. Our lease does require a professional carpet clean and cleaning before move out. We let everyone know as they give notice that this is a requirement ( we tell them at move in as well but its nice to remind them) I give them an idea of the costs involved. The residents who opt to hire another company do the work end up paying more ALWAYS. We explain to them that because we have an on going relationship with our vendors we are able to secure lower prices. I also make sure to point out how much less stressful moving can be

Mindy said it best - It's less insulting to both parties!

  Michelle
This comment was minimized by the moderator on the site

This is all well and good for situations when all you are going to do is clean the carpet; but what if you are going to replace the carpet due to age or damage?

Let's say you have a policy of replacing carpet every 5 years, but have a 7 year resident move out. You are going to be replacing the carpet based on wear and tear anyway at no charge to the resident.

Let's switch it around and say you have a 3 year resident with pets and there was damage to the carpet to such a point that you need to replace it? What if it was new when the resident moved in?

  Johnny Karnofsky
This comment was minimized by the moderator on the site

I still think this is a great idea for property landlords out there who want to provide the best and the most efficient service they could provide their renters. So, those interested in implementing this should plan it carefully.

  apartments in beaverton or 97006
This comment was minimized by the moderator on the site

Johnny, here are two ways to approach this issue, and it is a valid one. The first thing to do is to create a Property Carpet Install Data Sheet. This is done, usually by the Maintenance Supervisor in conjunction with the Manager, or the Manager can do it. It can be created in Word, Excel or old school paper and pencil. List the units, the date the carpet was installed. It should be updated as carpet is replaced. The second step is to include the install date in the Lease or Addendum to the Lease.

The other way to keep track is to simply add it to the Move In Inspection Sheet when the Resident moves in. I would still keep the Data Install Sheet anyway because it can stay in the Leasing Office; then if the MS or Turn Tech forgets to record the carpet install date, the Leasing Professional can do it.

The Lease still contains the language about the carpet cleaning charge with additional verbiage regarding your carpet policy of the POSSIBILITY of changing carpet after 5 years. I have seen Residents who have lived in their units for 7 or more years who have pristine carpet at move out (which is the reason I like to provide carpet cleans for Residents at renewal.) For those Residents who move out and have damaged their carpet to the point it needs to be replaced, you charge according to age of carpet and prorate that charge.

  Mindy Sharp

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