Today, apartment owners and managers are luring prospective residents with discounts and concessions to maintain or boost their occupancy levels. While store gift certificates, free concierge service or free parking are harmless enough marketing ploys to attract residents, owners and property managers also have resorted to tactics with more serious, long-term implications.
These strategies include reduced or free rent, $99 security deposit specials or waiving security deposit requirements altogether. These drastic measures can help fill apartment units, but they may also lead to the same unfortunate scenario that befell many Internet companies, as owners and managers sacrifice risk and financial management principles to lease units quickly.
So how do owners compete effectively when competitors are offering prospective residents the option of paying a $99 security deposit or no security deposit at all? They offer a “non-concession concession.”
This strategy allows owners to compete aggressively for residents to achieve maximum occupancy levels, while effectively managing risk and balance-sheet principles.
One example of a perk that doesn't involve a concession is an alternative to the traditional security deposit that allows residents to lower their move-in costs while affording owners equal or better protection.
The most widely accepted of the new breed of security deposit alternatives centers on an innovative surety product. At the lease signing, the renter is given the option to purchase either the surety bond or pay the traditional security deposit. Other options include insurance programs in which renters pay monthly premiums.
The renter who selects the surety option signs a short form acknowledging the purchase of the bond and makes payment to the surety. The surety in turn assures the property owner that the renter will fulfill his obligations to the owner at the end of the lease term. If the apartment renter leaves a damaged apartment, skips out on the last month's rent, or in any other way fails to fulfill his lease obligations, the surety pays the owner on behalf of the renter and then seeks reimbursement from the renter.
This surety model offers a minimum coverage of $500, with coverage in $250 increments thereafter, providing an owner with the flexibility to set a bond level appropriate to local market conditions and to the perceived credit risk of the prospective renter.
For example, for $500 worth of coverage, a resident need only pay $87.50 for a surety bond. In apartment markets where a traditional security deposit equals one-and-a-half month's rent, the savings to the resident can be even more significant. For a rental unit that costs $1,500 per month, a renter might pay only $399 for a surety bond vs. $2,250 for a traditional security deposit. At lease signing, the renter pays the one-time, non-refundable premium, which remains in effect for as long as the renter resides at the leased apartment and even if the tenant moves to another apartment within the owner's portfolio.
With this option, a potential resident may be drawn to a property because the surety bond is cheaper than a security deposit, but the owner concedes nothing.
Owners and managers must consider the implications of their marketing tactics carefully so they can lease-up units today while remaining financially competitive tomorrow.
By offering residents a discount without conceding the principles of good risk and financial management, owners and managers can resume their focus on providing a high-quality community for their existing and incoming residents for years to come.
Paul Kaliades is president of Madison, N.J.-based SureDeposit (www.suredeposit.com), which has surety contracts on more than 500,000 units.