New Legislation Takes Aim at Security Deposit Reform

To help meet renters’ needs in the current multifamily housing climate, cities and states are starting to take a closer look at move-in affordability and, specifically, security deposit requirements. Legislation is being adopted across the country that mandates property operators offer alternatives to traditional security deposits to minimize the upfront financial obstacles that sometimes stand between prospective renters and their new home.

As the national economy climbs out of the COVID-19 recession, workers get back on their feet, and apartment operators recuperate from the impact of the pandemic, security deposit replacement laws continue to gain traction. It is becoming clear that lawmakers have joined apartment industry leaders in supporting the conclusion that the traditional security deposit system fails both renters and property managers.

“Affordability is an increasing concern for apartment renters. Many prospective renters live paycheck to paycheck—according to one report, the number is nearly 80 percent—leaving them ill-equipped to afford the large, one-time expense of a deposit,” said Marcie Williams, president of RKW Residential. “On the operator side, managing deposits and refunds can require a considerable amount of time and hassle, which is frustrating because deposits usually provide inadequate protection against unpaid rent and apartment damage.”

A growing number of states and municipalities - including Seattle - have already implemented restrictions on security deposit management, limiting the maximum deposit requirement, dictating the window in which deposit refunds must be distributed, and, in some cases, requiring property managers to offer deposit installment plans. These changes show that the legislation is trending in a direction beyond restrictions, and mark a clear departure from how traditional deposits are handled.

Cincinnati pioneered security deposit alternative legislation with its Renter’s Choice law, which stipulates that if a property manager requires a security deposit, a deposit alternative or payment plan option must be offered as well. Deposit alternatives come in various forms, including surety bonds, deposit installment solutions, and guarantors. These alternatives enable renters to choose how they pay their security deposits — reducing upfront costs but without eliminating deposits entirely. 

Atlanta has also passed a law that requires apartment operators  to accept either rental security insurance or a monthly installment plan when requested by a renter. Due to the nature of this Renter’s Choice legislation, operators still have to deal with administrative and compliance burdens associated with deposits and deposit alternatives. 

However, when operators choose to implement lease insurance software that automates deposits out of leasing altogether, they can avoid legal requirements like those found in the Atlanta Renter’s Choice law, and several similar, related laws to come. Lease insurance — a solution which represents a complete elimination of the security deposit model and its alternatives — creates enhanced property protections and replaces upfront security deposits with monthly deposit waiver fees.

Most recently, a new bill was passed in Texas that codifies the practice of utilizing a small monthly deposit waiver fee instead of a large deposit upon move-in. Deposit laws like this provide operators true deposit replacements while leaving it up to the operator to select the best solution rather than mandating properties to offer deposit alternatives. 

With more cities and states passing laws and pledging commitments to address deposit practices, the rental housing landscape is constantly changing. What started as an effort to curb costly security deposits at the local level has evolved into sweeping reforms that are revolutionizing the way that the multifamily industry conducts business. 

Jordan Greek serves as VP of Sales for the Pacific Northwest for LeaseLock. Greek joined LeaseLock after working at Knock where he served as Vice President of Sales for the company's Northwest division. Prior to Knock, Greek spent seven years at Zillow, where he managed revenue growth and retention, and planned and executed new customer acquisitions. Greek also evaluated, closed and managed new strategic business partnerships, oversaw market analysis and provided leadership in the design and implementation of strategic business objectives.