PERSPECTIVE: Why Budget for Bad Debt?

By Richard Schreiber, president of SureDeposit and Mark Copeland, COO for Alliance Residential Management LLC As budget season approaches, apartment owners and managers are once again budgeting for bad debt – those monies unrecovered by collections after a resident has damaged a unit or skipped out on rent. According to just-released data from the National Apartment Association (“2008 Survey of Operating Income & Expenses in Rental Apartment Properties’), owners and property managers of market rate properties lost on average $70 per unit last year to bad debt.  That amounts to some $2 billion industry-wide, a confounding “cost of doing business” when you consider the fact that a good portion of those losses could be avoided. In fact, instead of planning for those losses, multifamily owners and property managers can take steps now to budget for less bad debt next year and apply that “found money” to their bottom line. Alliance Residential Management LLC, for example, achieved a nearly 150% increase in its recoveries with the use of a security deposit alternative over a five-year period.Security deposit alternatives, coupled with a strong resident screening regimen, can have a measurable impact on your firm’s bad debt picture This is especially true in today’s teetering economy which has impacted consumers’ credit standings and continues to threaten job security. A qualified screening provider can provide details about an applicant’s credit payment history, as well as how the resident performed with regard to previous housing obligations, based on records such as landlord-tenant court, eviction filings and collection accounts. Security deposit alternatives can also play a key role in a company’s financial picture and are already part of a sound risk management strategy at more than one million units nationwide.  In the case of one security deposit alternative program which offers a surety bond, renters can opt to pay as little as $87.50 for the non-refundable bond premium for $500 worth of coverage which protects the owner/property manager. So, instead of paying $1,000 for a traditional security deposit, for example, a resident can opt to pay a $175 non-refundable premium for the security deposit alternative – an expense less than one-fifth the amount he might otherwise have had to pay.The provider of the security deposit alternative program pools the bond premiums for each property company’s sole use, less a fee to administer the program, to cover losses resulting from any lease violations. The bond premiums from both residents moving out in good standing and residents moving out with obligations are available for claim payments to mitigate the inevitable losses.If the resident moves out at the end of the lease term without incurring any lease-covered damages or violations, he has no further obligations. But if he incurs damages or owes rent, the owner files a claim with the surety for prompt reimbursement of the debt amount up to the coverage limit.In the case of Alliance Residential Management LLC, a large multifamily property management firm with 16,000 units nationwide, offering a security deposit alternative to residents at lease signing since 2003 has allowed the firm to budget for far less bad debt.  Using surety bonds, $2.9 million has been recovered from the surety versus the $1.2 million that would have otherwise been recovered from traditional security deposits. This translates to an additional $1.7 million, which went straight to Alliance Residential’s net operating income.  While bad debt cannot be entirely eliminated, owners and property managers such as Alliance Residential Management LLC can benefit from the financial windfall a security deposit alternative program can offer because it provides a level of coverage for the apartment community that may exceed that of a market-based traditional security deposit, especially in those markets where owners have offered reduced security deposits as a leasing tool. The integration of a security deposit alternative program with a resident screening service provider can instantly and exponentially enhance a property management firm’s risk management process without added expense or manpower. For example, a leasing agent may offer high credit applicants a surety bond only, while lower credit applicants may be required to supplement their bond with a smaller cash deposit. The operational efficiencies this kind of integration provides protect owners/managers against problem renters even further. Some lost revenue is inevitable such as that due to vacancies, for example, and not all bad debt can be eliminated. But when there are tools available to the industry that better insulate owners and property managers against losses they could never otherwise recover, the failure to look at resident screening providers and security deposit alternatives only adds insult to injury.