Security Deposit Alternatives

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teaching new renters to trust
The topic of damage/security deposits is one of the most contentious in the vacation rental industry and not without cause.  Home owners take a risk when offering their property for rental and the degree of stress this will cause is highly dependent on their tolerance and attitude to risk.  There are different options available and the one you take may depend on identifying what your take on risk is.

There’s been a lot of research involving risk and attitudes, mostly related to project management, and the subject can be complicated, however it can all be stated fairly simply that the level of tolerance to the risk taken in our vacation rental business is related to the attitude we take as owners to our guests and the potential for damage they may cause.

Are you risk averse, risk neutral, or risk tolerant? Your attitude to this could impact your choice of security deposit method. Here’s a couple of examples

Owner A is new to rental and has heard all sorts of horror stories about partying, overcrowding, damage and things going missing so could be classed as risk averse.  She is fearful this will happen at her house so requires a large damage deposit that will be returned after the vacation is over and the property has been checked.  She has an extensive set of ‘rules’ guests must follow and may even have additional charges for things like ‘Extra Cleaning'; ‘Garbage Removal’, and/or ‘Broken Items’.

Outcome: Guests to A’s property may feel they are not trusted to behave in the way the owner expects.  They may enjoy their stay but spend their time worrying that they will be charged for any breakage or what may be generally considered ‘wear and tear’.  Their reviews may rave about the location and quality of the property, but will probably mention their experience was spoiled somewhat by not being trusted and worry that they may not receive their damage deposit back in full if they transgress in any way.

Owner B is risk neutral. He recognizes that the fear of the risk far outweighs the probability, however also appreciates that accidental damage may happen and wants to be covered should something occur that was not foreseeable.  This is something like a pan with a hot handle being dropped on a ceramic hob, or a red wine spill on a carpet.  He takes a two-pronged approach to the security deposit issue and uses a third party damage protection policy which costs his guests around $50 (coverage up to $2500), and also holds a credit card authorization for non-accidental or pet damage.  B’s  Property Guide clearly states the damage protection policy does not cover damage that could have been foreseeable or preventable and the rental agreement asks guests to sign to agree to be charged for non-accidental damage such as that caused by pets.

Outcome: B’s guests feel comfortable they have coverage if something should occur accidentally, but this doesn’t tend to make them less careful.  Their responsibilities are clearly stated in the Terms and Conditions of rental and are generally clearly understood.

Owner C is very risk tolerant, has been in the business for many years with very few incidents of damage of any nature.  She recognizes that her guest groups have varying standards of cleanliness but balances the many great changeovers against the odd poor one.  She has never charged any guest for accidents and enjoys a very high rate of repeat guests.  She does not take any form of upfront damage deposit however self-insures by collecting a $49 damage protection fee from each booking.  This is put into a fund that is used to replace any damaged item or repairs needed.

Outcome:  C’s guests feel valued that the owner trusts them to look after the property.  Because of the high rate of return guests, they have more of a vested interest and generally leave in in excellent condition.  In fact on the occasions where something has been broken or damaged the guests have often left a sum of money for replacement or repair.

Everyone has an opinion on this topic and some owners who have been renting for many years would not consider doing anything differently, but there are new options and products available that can help create a more confident and trusting relationship between owners and guests. It may be worthwhile thinking about an alternative to your current security deposit approach if your risk tolerance improves.

Posted in Bayer's Blog, Tips for property owners

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