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Property Management Mastermind Show

#138: Security Deposit Alternatives

Mar 21, 2022 by Brad Larsen

This week on Property Management Mastermind, Brad talks with Eric Wetherington of PURE Property Management. After having similar issues with getting tenants in their doors due to a lack of upfront money for deposits and fees, we discuss a number of possibilities on the future of security deposits. Have we found a solution? 

Check out Eric's website at https://yourris.com/

BRAD: Everybody. On this week's episode, I've got Eric Witherington coming on and we're going to be talking about security deposit alternatives and his exit with pure. It'll be a fantastic convo.

ANNCR: Welcome to the Property Management Mastermind Show with your host Brad Larson. Brad owns one of the fastest growing property management companies in San Antonio, Texas. This podcast is for property managers. By property managers, you'll hear from industry leading professionals on best practices, new ideas, success stories and lessons learned. This is your opportunity to learn about the latest industry buzz surrounding property management, as well as tips and strategies to improve your business.

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BRAD: Welcome everybody to another edition of the Property Management Mastermind podcast. I'm your host, Brad Larson. And today's guest I'm bringing on former Norfolk president Mr. Eric Witherington. And we're going to touch on a few things to include hot topics of the day and to talk more about a few things that Mr. Eric has going on. That is going to be very interesting. And so we're going to talk about it like a consumer perspective. I want to see kind of what it would do and how it would fit into potentially our management company here at Rent Works in San Antonio and Austin and see kind of what that goes from there. So I want to give Eric a little bit of an opportunity here to introduce himself and then we can kind of go from there and have a fun conversation. Eric, how are you doing today?

ERIC: Doing great, Brad. How are you.

BRAD: Doing? Good, man. Beautiful bald head. Got to run this morning. I got a new swag top with RIP works on it, man. I know you can see it in the video.

ERIC: It's looks nice.

BRAD: Life's good, you know what I mean?

ERIC: Maybe you can bring me one when we see each other in San Antonio in a couple of weeks.

BRAD: Man, it's going to be I'll probably be wearing this on stage because it's such a cool piece. You know, the the swag tops. You always got to have something with your brand on it, right?

ERIC: Absolutely. I absolutely agree.

BRAD: Okay. Well, tell me a little bit. I mean, just imagine nobody has ever heard of you. Let's kind of give us a few minutes of who you are, what you do, because that will kind of set the tone to your background and give us a fun lead into this conversation.

ERIC: Sure, Brad. No problem. So got my career in property management. Started back in late 2008. Really been in real estate and related services and financial industry services since 1995, setting up companies and doing a lot of different things all over the country, working with real estate brokers and lenders and things. But in 2008, I started a property management company here in Charleston in partnership with a large local real estate firm. And at that time, of course, the market was crashing and people didn't have the option to bring in 100 or $150,000 in cash for the privilege of selling their home to somebody else so that they could move to a different city and have a job.

BRAD: And this is Charleston. Non Charleston. There's only two states in the union. Yeah, there's two states and then there's non Texas and Texas. So this is Charleston. Non Texas. Got it.

ERIC: Keep going. That is correct. That is correct. So so we we began that property management business back then and of course, was a great time to start property management. And we helped a lot of accidental landlords or landlords by default, as I like to call them, manage their properties over the years and then built a good investment following of clients as well. And then just recently, just last August, we sold that property management business to Pure Property Management, which of course is a national property management company that is building and growing and seeking to change, change the dynamics of the property management industry on a national level. So along the way I got a lot of help from the National Association of Residential Property Managers and the Great Folks. That's how Brad and I met and just a lot of great folks in that organization that was privileged to serve on the National Board and privileged in 2019 to serve the property management community as the national president. So that's a little bit about my background. Brad.

BRAD: Love it. So I mean, a couple of things we want to touch on is we talked about this in the green room. We want to go about some current affairs stuff and how that might affect the property management rental real estate market world. But we'd also like to dive into your exit, your acquisition with Pure because everyone wants to understand those a little bit better from both perspectives. They want to understand the seller side, they want to understand the buyer side. So I mean, I'm not going to ask you a lot of tough questions like numbers, but we want to kind of talk through how that acquisition played out for you and your business that allowed you other opportunities that you could go down. So now here we are. It is middle of March 2022. The Russians have invaded Ukraine. And so it's very troubling to watch. Of course, you have this sovereign country being invaded. And if there's ever any answer to why we have the Second Amendment, it smacks you right in the face every time you look at Ukraine. So what I want to talk about is how it's going to affect us as property managers, people in real estate, renters, tenants, owners. We want to talk about that. And there really is no crystal ball, let's say. But we do know one thing. Fuel prices are going up. So if we're talking just about maintenance and leasing, I mean, what are a few things that could be affected just on your side of the world?

ERIC: Well, I'm sure you're seeing the same thing in property owners. Starting to be concerned about maintenance prices. And maintenance vendors for the last couple of years have had struggles with supply chain getting materials, getting appliances, getting windows or doors. And so that's been driving up prices. And now with gas prices going through the roof, we're certainly seeing increased prices from vendors. And that's those price increases are being passed down to the consumer, i.e.. To the property owner. And so we're getting a lot more properties, a lot more property owners are saying, well, why can't I just do my own maintenance? Why do I have to have a licensed professional do maintenance on my rental property? And of course, I don't want to get down on that rabbit trail, but that's always a bad idea. It's always best to have a licensed professional work on your rental property. So so we're just we're seeing a lot of impact and as as consumers, as renters from a tenant standpoint, Brad, as renters are having to pay out more money for food, more money for for fuel in their cars, more money, it seems like, for everything it's getting, it's getting more and more difficult for them to think about moving or be able to move into a new rental property where they have to come up with a full month's rent, a full month security deposit or more deposits for their utilities and all the other things that go go in conjunction with moving. So we're just we're just putting a real, real hurt on our consumers right now with all of these prices going up.

BRAD: Oh, I agree. And so the fuel prices alone, I mean, that's going to cause vendors to need to charge surcharges for fuel. I mean, obviously, when diesel spiking above five, it's five bucks a gallon. It really kind of puts a strain on just good old fashioned maintenance and that's going to get passed down. And that's kind of an unfortunate inflation is really where we're going to see some negative numbers, let's say some some negative effects because now everything's more expensive. As you mentioned, food, cost of living, energy. It's just everything's going to be more expensive just because of inflation to include the price of these rental homes. We're seeing quite a bit of appreciation in the real estate market on the sales side. And of course, that goes right into the side of the rental amounts. I mean, the rental amounts are going up and the amount of renters are potentially going up. We're seeing this mass migration from one state to another, from different areas to wherever that could be. And so it's causing a lot of moving. You know, you've always seen you might have seen the the thing with the Ryder trucks and U-Haul trucks to where it costs 100 bucks to leave California and go to Texas. It costs $10,000 to rent a truck and go to California. You know, I'm being funny with those numbers, but it's just like that's a sign of the of the mass migration that we're seeing into different places of the world. And for whatever reason it could be, we don't need to touch on it here, but everyone kind of sees and gets it.

BRAD: And so how it's going to affect us, the conflict in Europe, it's going to be more of a trickle down effect. And it could be over in days. It could be over in years. We don't quite know. And it really kind of depends on who's going to blink first. I mean, they're it's getting pretty bloody and pretty slushy and war is never pretty. So it's going to be an interesting deal to see how that affects us. And I hope it doesn't get any worse. We don't want to be dragged into World War Three, and now we have just just really bad stuff going on there. I mean, I shudder to even think about it, but without being Mr. Doomsday, let's let's transition a little bit. I'm super curious about your exit and how it went with Pure because I want to touch on that first and I'll lead into kind of what you're doing now and what your next new ventures are going to be. So that's mentioned. I don't want to ask a lot of prying questions about numbers that you're really not allowed to divulge. But give me a state of the business that you had there in South Carolina and kind of how it all worked for you. I mean, you had a big company of X number of units. You know, you don't need to talk about revenue, just kind of maybe give us some some rough idea of the scale and kind of how it worked with that exit in transition. Just give me a few notes on that.

ERIC: Sure. So we had a good business here in in the Charleston market. And we're one of the leading property management companies in this market for a good long time. And, you know, just realizing, as I was looking at what was going on in the industry overall, looking at what we could do, we could certainly have grown into other markets in South Carolina and even some neighboring states if we had wanted to. And that was something that we had talked about and thought about over the years. But seeing that there was a lot of consolidation and a lot of need for enhanced technology solutions that would bring platforms together to make it easier for property managers to manage properties. Because as you know, Brad, the average property manager is using anywhere between eight and 12 different systems for their property management solutions to run their business. And that's just it's crazy. It's a lot of extra work, a lot of time. And and so I've seen these things and got approached by a couple of different companies last year. I've been approached by companies all the time, but just over the last year just got approached by two companies and and just realize that maybe this was a great opportunity to join the team at pure give my team an opportunity to have career advancement that that they wouldn't get for for our local property management company here and and just give us an opportunity to to take on a national level some of the great things. That that we did at New Heights Property Management and expand those and grow those and then give our give our owner clients a greater greater opportunity to be able to tap into more investment options for them. Properties around the country that we didn't have access to really in what we weren't giving them access to. So a lot of a lot of reasons that that caused us to go ahead and pull the trigger on that, Brad. But that's kind of a nutshell.

BRAD: So yeah, I mean, a lot of times people, sellers like yourself, owner like yourself, you get approached and it is kind of like a realization like, Oh, whoa, I got this opportunity. Maybe I need to take advantage of this because essentially, you know, we've all heard the saying you took some chips off the table, you probably reinvested some chips back into the to the bigger entity. And so now what is your role with Pure as the big mothership? The big entity? What are you doing there?

ERIC: Yeah, sure. So I'm the vice president of Strategic Initiatives, part of the executive leadership team. My role there is to help pure come up with new ideas and ways that we can increase revenue per door and also drive down expenses for the operations side. So just really involved in a lot of the day to day things and strategizing and thinking about where we're headed in the future and what's going on. Well well, helping the operations team be more efficient. So it's exciting for me. It gives me opportunity to spend more time doing the things I enjoy doing. And and it's just good to get a chance to work with great people, people that have been my friends for many years, whether it's Mike Catalano or Jennifer Newton or many others that are part of pure. And so it's exciting.

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BRAD: Yeah. They've done a really good job of the consolidation roll up type scenario, building it. It's going to be neat to see how they progress. And all those folks are great folks over there, too. So I agree. They're a real good, real good organization. And it's going to be interesting to see how big they can get if that's their end goal and kind of where they can take the direction of this now. You mentioned you're increasing the revenue for potentially increasing revenue per door. So that's going to be my presentation at the open. Broker owner conference on main stage is going through six to 8 to 10 different ways of how you can generate more per door, more revenue per door. And then of course it's up to you to cut expenses, but that equals out to be more profit per unit is the big thing. The BPU is the big one. And so that will be my presentation for the broker owner conference. But that also falls in line with one of the things that you and I have been very passionate about. You've seen me give a presentation. You've helped me create that presentation of talking about the no security deposit option.

BRAD: And so this is a real good segway into kind of what we're doing because it falls in line with generating revenue per door, right? That whole thing of making more money. But it also falls in line with what you and I believe is that the security deposits are eventually going to be a thing of the past. It could be one year, it could be five years. But we think you and I and a lot of others in our in our industry and our mindset feel that security deposits have become so full of legal landmines, landmines and legal ramifications that it's just not worth doing any longer. And so there are some alternatives out there. And so I think we should take a few minutes to kind of go through some of those alternatives and kind of talk through this whole concept of doing a no security deposit leasing scenario. I mean, we have touchless now. We're getting in a no security deposit options and we're kind of behind the times, as, you know, as apartments have been doing this for years and years. So take it from there. Let's see where we go with this.

ERIC: Sure, Brad. So this kind of kind of got on my radar screen a few years back when my daughter was doing her internship in college. She was a senior and she landed an internship at the Charlotte Motor Speedway in Charlotte, North Carolina. And so here's a 21 year old young lady who had a zero credit score because she didn't even have a credit card. She had no debt, she had no job, no income. And she needed to go to Charlotte to rent an apartment. And so Dad, being the the savvy property management person that he is, said to my daughter, Well, find an apartment and let me send me the send me the lease to sign because I'm sure I'll have to be a co-signer and I'm sure I'll have to put up, you know, six months worth of deposit or whatever it is, because here's she's living in there and she's got no income. And the internship was going to pay her a very small amount of money at the end of the internship. So she got no pay during the entire time of the internship. Well, she found an apartment. She got presented with all the documents, she signed everything. And I said, Well, when am I getting my paperwork to sign? And she goes, Dad, there's nothing for you to sign. I said, They don't want to co-sign security deposit. No. I said, You've got to be kidding me. I said, You better send me that paperwork so I can look at it and see what kind of scam they're pulling on you. And and so that was kind of my introduction into this idea of, of the multifamily side, just renting to people with no income, no no means of paying, no credit history. Oh, yeah, sure. We'll rent you an apartment for 150 bucks a month. No problem. And so that's when I said, man, we've got to be start thinking about this in the single family space.

BRAD: Yeah. Now, you saw me give a presentation on this at the Southern States Conference, and then you and I really started to kind of talk about it offline and kind of we decided we went through a vendor and did this for three years and then this recently we've done self insured where we do it ourselves, but we really got to talk about all the options out there to give people the full scale of what it is. So we've got to put this into context. I mean, it's one thing to say don't do security deposit, but there is smarter choices to this. And so, you know, we have you know, bear with me if I forget something because we're shooting from the hip, because we have the bond, you have the bond issue, you can go buy a security deposit bond and that can be 700 bucks for 1500 dollars of coverage. I mean, correct me if I'm wrong on that. Let's talk specifically about that kind of paraphrase more about what you understand as the bond scenario.

ERIC: Well, let me let me start let me kind of take up a notch quick, Brad. I mean, at the 50,000 foot view, because what we have seen in the last three years is a movement among states and local municipalities to pass laws that are what what fall under the umbrella of renters choice. That's kind of the the catch phrase that has been tagged with all of these laws. So these renters choice laws are now have been passed or are pending in nearly a third of all the states in our country. And so this is a is a movement that is is certainly taking hold. And I totally agree with your statement from earlier, Brad, that in 3 to 5 years, I think security deposits as we know them today will really be a thing of the past. And so then the.

BRAD: Question that renders choice a little bit better, because that's really, you know, what is it like? Go through the renters choice as you understand it.

ERIC: So the renters choice then means basically you as a landlord have to give your renter some options to either give you a security deposit in cash like traditionally they do, or to provide a bond or to provide some kind of insurance policy or insurance protection for in lieu of the security deposit. And so that's where the renters choice moniker comes into play, because the law is requiring the landlord to give renters options other than just a traditional security deposit.

BRAD: Specifically on that, for example, Texas has passed this law and you and I have looked at this and the language is super gray and it's really kind of baffling and we don't fully understand it. I've gone through two attorneys to look at it, and it's really just it's just a really poorly written law. And so, I mean, what we did at Rent Works is what we did. I'm not going to go into that because that's just that's our own decision. That's our own business decision, whether it's right or wrong or other. And so that can change any minute because we could find a solution that could be, all right, this is going to be the way we want to do it in dealing with this new law that they passed the middle of the night that took effect in September. That seems to be very self-serving to one specific industry in that particular niche of this idea. And so that's it's past in Texas getting like 92.111 is the statute for the Texas law. And so if you don't think it's coming to your state or your municipality, it is. And it's in probably more than we know of at this point, right?

ERIC: Absolutely, Brad. And and and that's why it's so important for us as property managers and for landlords, for property owners, investors to be involved in what's going on legislatively in the the municipalities and in the states where they own rental properties or where you manage rental properties because these laws can they can just pop up overnight. Next thing you know, they're getting passed. And then it's like, wait, wait a minute, what? What? And now you've got to change your processes and procedures and and do different things. But but so you've got your traditional security deposits, Brad, you've got your bonds, like you said, in a bond, is typically just putting up a sum of money that in lieu of a security deposit that says, if I if I'm going to create damage or cause damage to a property, then that bond would stand in place of the security deposit and would be used to cover those damages. And then you've got the insurance products that are out there. Some of these insurance products have been around for a long time, for many, many years, but just not very widely known and certainly not widely known in the single family rental space as we have now. But if you look at the data from the last couple of years, whether some of these big insurance companies and I've looked at their data well in excess of $4 billion in coverage over the last three years in security deposit products. So there's there's a there's a there's a big space there and there's a lot going on.

BRAD: Yeah. Especially when you're told you have to do this. Right. It's kind of like, okay, well, we need to figure out an alternative that one protects the owner that we manage for, right? Protects us the property manager, and essentially protects the tenant from themselves. And so we have to provide services and protection for, don't forget, vendors in there too, right. Because vendors are entering the homes, etc.. So this is I mean, everyone that's touching this home, tenant, vendor, owner, property manager needs to have some sort of protection in and around that. And it all circles around the security deposit because you know, you can self insure, right? You can do the bonds, there's other insurance products. But I think what we want to touch on is the self insured is one thing that's kind of just it rings true to what the phrase is. The other side of that is what you guys are offering or what you're working with and your insurance products, because you kind of have to go take a step back there and say, okay, well, since I've sold the Pure, I am now practicing to be a male stripper. Well, probably not. But you're getting into the insurance realm of doing something really cool there. And so I wanted to hear more about that because I think this is kind of where we want to get into this podcast and and talk to me like you are like I'm the consumer, you know, I own research and all that good stuff. Talk me about this from that perspective because we want to hear it. We want to hear the long form elevator pitch of what it is and how it works.

ERIC: Great. So thanks, Brad. So again, as I was going through this situation with my daughter and I realized that we needed to come up with a solution for the single family space. I was seeing that. This was obviously happening in the multifamily already, but it wasn't really widely known and widely accepted in the single family space to offer the tenant an alternative to their security deposit. And so I look at three things. Anytime I'm doing anything in the property management space, I'm a I'm a property manager, you know, manage properties and manage properties for a long time. So always thinking about certainly the property manager, but most importantly, what's good for the tenant, what's good for the owner. And then is there a way that I, as the property manager, can make some profit off of offering something good for the owner and good for the tenant? And so when all those three things meet, then you've got what I think are great ideas. And Brad, I know you think a lot along the same lines and have always thought that way at Rent Works and, and in your presentations that you give at different conferences that that you and I get to attend together. But so I was thinking, how can we offer something that helps reduce the amount of money that the tenant has to bring to the table to move in? Because, again, you look at average rents in our market right now are in the 15 to 1700 dollars range. And so if somebody has to come in with a first month's rent plus a full month security deposit, you're you're at 3000 to $3500 right off the top.

ERIC: Then you've got to come up with four or five or $600 for utility down payments. You're pushing 4000 plus just to move into a new property. And that is a lot of money. And so so in some way, how can we reduce the amount of money that a tenant has to bring to the table? So how can we eliminate them having to come up with that big check for a security deposit? On the owner's perspective, the owner is going to say, wait a minute, you don't have a security deposit. No, we don't. But we have something better. We have something that's an insurance policy that offers you even more coverage if you want it or in if you and the property manager decide you can get even more coverage so that the when the tenant leaves, they can be protected. And I mean, I can give you a claim story that just literally happened just last month where we had a tenant move in and they signed up for a security deposit replacement program. They gave their first month's rent and and they moved into the house. Well, their first month's rent bounced. And so now they're living in this house and they haven't paid anything. So a couple of weeks took a little bit of time, but got them out of the house. Well, then what is the recourse for the property owner? Well, in this case, because the policy had been elected by the owner, then the policy paid out the policy limit to the owner to help cover the damages. If that tenant had moved in under a traditional security deposit program, their first month's rent check would have bounced.

ERIC: Their security deposit check would have bounced. That owner would have had zero coverage, nothing. They would have got nothing and ended up out of pocket several thousands of dollars. So that is an example where a security deposit insurance product can actually who finds himself in that unfortunate situation where somebody bounces checks before they even before they even move in or do anything. And then how can this benefit the property manager? Well, the property manager is doing work there. They're administering these programs. They're doing all these things. And so how can the property manager benefit? Well, unless a property manager is a licensed insurance agent, they can't get a portion of premiums. But through a captive insurance program, they can be an owner in an insurance company and they can receive profits that that captive insurance company produces as a result of the premiums that are paid. So that's the model that we went with at Renters Insurance Solutions so that the tenant could win, the owner could win, the property manager could win, and we could get people into rental properties faster because they have to come up with less money. They pay a small monthly insurance premium to cover that security deposit replacement insurance. The owners love it because they're covered and we don't have to deal with all the various laws and different things that relate to a security deposit. Every state is different. Every state has different requirements for security deposits. And then lastly, the property manager can benefit because they can share in the profits as as those profits are produced through the captive insurance company.

BRAD: So there's lots of ways to implement this. Now, I'm going to talk about what we did and some of our lessons learned in the last couple of three years. So we've been using this type of a program with with other vendors for three plus years. And we give the tenant when they come in and do the application to rent, we give them the option to door number one or door number. To write door number one could be your your little bit of monthly per month. And that could go for an insurance policy. It could go towards a bond, it could go towards whatever the property manager decides to implement or door number two, which is a regular security deposit. Right. So they have to elect door one or door two. Now, here's the lesson learned is when we first implemented this, we allowed them to choose door number two, a regular security deposit at a regular common and customary rate of one month's rent, for example. And we're only getting 40% adoption for 0% adoption of that. So only two out of five tenants wanted to come in and take that option, which still left us dealing with security deposit itemization, but still left us dealing with a bunch of security deposit worries that we really just wanted to get away from. And so what we ended up changing about eight or nine months ago is we made it a more compulsory figure to wear OC your door number one, your easy button is going to be a small monthly amount OC or door number two could be 2 to 2 and a half to three times the monthly rent in a security deposit.

BRAD: So when you look at the math door number two, which is a stupid high amount or door number one, which is a little tiny monthly amount, we were getting mass adoption into the easy button door number one of the small monthly amount. And so that's what we've done. That's a lesson learned that we've done. Now that can't apply to every state because some states have limits. Some states won't allow you to do any of that type of stuff. But it's something that we felt was fair because we don't want to deal with security deposits. By the time you start talking legal fees and lawyers and you just putting your owner at peril by putting them into a scenario where the property code, which can be changed at any moment, which is very tenant friendly, the property code is very tenant friendly on security deposit. It puts them in that bad scenario to where they have to fall in line with that compliance. Now, it's not the end of the world. We've been doing it for years and years like your team has, but we want to get away from it for one, make it easier, move in process. You remove the barriers of entry. The barriers of entry to move in are money. I mean, if they've got to come up with four or five grand to move in versus 1050 hundred bucks to move in, I mean, which would they rather do? What's going to make it faster? I mean, all of this above. So what did I miss just in those few minutes?

ERIC: Well, Brad, I think I don't think you missed anything. I would I would add on to what you said, the risk and the liability that a property manager has, the property management company has when they're holding. Tens and hundreds of thousands of dollars in security deposits. I don't know if you've ever been involved in these situations, but I've been involved in several situations as a court appointed receiver or in other capacities where the property management company was holding thousands and thousands and thousands of dollars of security deposits and that that escrow account got drained by an unscrupulous employee or by an unscrupulous owner, whatever the scenario was. And now. You know, there's liability. If it's an employee, there's liability on the owner side, on the the company owner side of the property management company. If it was the owner of the property management company, all the tenants and all the all of the owners, they just lose. They they lose. And those are those are not fun calls to have. Hey, you know, that money that you that that property management company was holding for you is gone. It's nowhere. And and, you know, kind of sorry, there's no option for you. So there's a big liability that property managers have, owners of property management companies have when they're holding a big amount of security deposits. So that's another benefit that these kind of programs kind of take that liability off the table for the owner.

BRAD: Yeah, it's a double edged sword because we have these the banking institutions that offer bank credits. So you do get a little bit of reference or points from having a half million and 2 million in escrow. Right. You get some opportunities from that, but it also causes you to lose sleep. Now, here's one thing I would recommend. This is what I've done, because I've been on that side to where escrow money and money in trust has gone away from unscrupulous employees. And so what we end up doing is we have to trust accounts, write. One of the trust accounts is in my name only. I'm the only one that can control that. I'm the only one that can control the movement of that money inside of that account. And so I keep the bulk of the security deposit in that one account that only I have access to, and I keep a working amount in the other trust account that the team has access to. So our accountant team, our accountants or the CPAs, they can have access to that as needed. But we're talking 50,000, right? We're not talking half a million or 2 million bucks. And so that that kind of can can alleviate your liability to a certain aspect. And it's not that difficult to maintain. So I would recommend that I know it's not it's not much work, but it does give you a little bit of peace of mind to say, oh boy, you know, they're using this the trust account daily with all the different log ins and all these different computers are logging in from. And there's a half million in there are 2 million in there or whatever it could be. That makes me a little nervous. But this is the technique that we've adopted. And, you know, there's no right or wrong technique, but it does it does kind of make a little bit of sense if you look at it.

ERIC: Right? Yeah, exactly. And there's a lot of like I said, there's a lot of different different ways to try to help mitigate those liabilities and those risks. And it's important to have a strategy to have to understand the risk and then have a strategy for your operation to mitigate that risk as best you can.

BRAD: So any time they're going to implement something like this, there's going to be a couple of questions. One, how do we make the owners whole? Like, how do we do them a good service? How do we explain this to them, how this is a good thing for them? And then two, it kind of goes along with it is you're buying a car, right? How much down and how much a month, right. So it's something we want to understand with the pricing of this. And because we understand the pricing, we can easily explain to the owner, say, Mr. or Mrs. Owner, you're getting this much protection, this much coverage, this much benefit. These are the features and it's costing X per month and the tenant is potentially going to pay for it. So it kind of take me through how that is all going to work.

ERIC: Sure. So with our product, we filed rates in every state, every state that that allows us to to have this product. We've filed rates in every state that give a range so the property manager can look at their portfolio and we assist them with this. We look at their portfolio of properties and see what their history of security deposit claims has been. And then we give their portfolio a rating and then based on that rating, they can choose how much security deposit do they want? Do they want a 1000? Do they want 1500? Do they want 2000? They want 2500. And they can just choose that that amount. And then there's a premium associated at that rating and at that level. And this this eliminates the need to get every single applicant rated. You don't have to do that anymore with our with our program because we just rate the property management company and then everybody falls into a rating and then it gives the property manager the option to decide how much coverage do I want to make sure my owner gets? So if if a if you're in a place where you only can collect one month security deposit, you might say, well, I want to make sure my owner gets one and a half times the rent for the insurance product. And, and it's at this monthly fee. And now your owner is winning because obviously they're getting more coverage, they're getting more value.

ERIC: The other way the owner wins is just and you alluded to this earlier, so it's really hard to get you know, there's a lot of things that go into security deposit disposition when you're holding a security deposit. The property manager sometimes has 14 days or 21 days or 30 days that they have to get all the repairs done and get that security deposit money out the door and then reimburse the tenant anything that's left, or tell the tenant that there is an overage or whatever. That puts a lot of pressure and a lot of strain on getting things done quickly. The insurance product. You don't have that pressure in that stress. So a claim can be filed, a payment can be made to the property manager, subsequently to the owner, and then the owner can decide if they don't want to make repairs. I know Brad here in South Carolina, we can't just give the owner security deposit money. They actually it actually has to go towards repairs or towards lost rent or towards something like that. So we don't want to repair that thing that the tenant damaged. And so just send me a check. No, no, you can't really do that. We have to have an invoice that shows that we spent the money on something. So. So, but the insurance product eliminates that step. You're not required to have an invoice. You just here's here's what it is.

BRAD: So, yeah, just just for example, on the security deposits, outgoing, if you, for example, in Texas, you have a 30 day window. Other states are smaller. But if you're if you have date time stamp, your stamp out the door is day 31. Well, technically, they got you. They can lawyer up and they can get triple damages. They can get attorney's fees all because it went out the door a day late. Right. Just a little technicality and they can get you. So here's here's the question on pricing. Everyone's want to go on to know as a revenue generating question, if you're paying X per month for an insurance product like this, what is your guidance on what they should or could charge above that? Can they charge triple above that? Can they charge nothing above that? I mean, give us a few minutes on that.

ERIC: So again, because our particular product is filed in every state with the insurance commission. And so we've we've filed with the security deposit replacement product and administrative fee up to $5, so they can charge up to $5 as an administrative fee over and above the premium. And that the property manager gets to keep themselves for the administrative work of of getting the data from their system to our system so that we can make sure who's covered and know what policies are going on. Then at the end of at the end of the day, as, as profits are being generated from those premium dollars, then we see our our members that are part of that captive insurance program can then participate in the profits. So we tell folks that they can make they can make as much as $200 a door per year or more, depending on the size of their portfolio and what's going on in their portfolio as additional revenue streams through offering the insurance products that we that we supply.

BRAD: So let me help everybody out there just kind of give you some rough numbers like these are just ballpark numbers, so don't quote me on this stuff, but for fun, let's say you give the tenant the option. Okay, Mr. and Mrs. Tenant, you're moving into this home. It's an X. Whatever the amount of rent per month, you have a couple of options. Either you pay 20 bucks a month, right? And it could be 25. It could be 30, it can be 52 or whatever. Just bear with me. I'm going to use a $20 fun figure or you pay a $3,000 cash deposit. And that's real that's real world numbers there. As far as, you know, ballpark, 20 bucks a month or 3000 up front. That's where you're getting the mass adoption of people saying, you know what, I think that $20 a month is a great option. I'm going to I'm going to go for that. And they have to understand that that's a fee is gone. It's not security deposit. It's not going to be accounted for at the end. So it's actually being used towards an insurance product to help guarantee that their stay is not overextended, is not costly with damages, and it's really meant for that. So it's not a security deposit, but it's a fee. But again, people, you have to understand that when given the option, most of us would choose the easy button of the small monthly fee. What are you seeing so far out there with folks you've been working with?

ERIC: So that's exactly right, Brad. And we're seeing over 75% adoption rate of the residents that are that are being presented with the option for the insurance product. They're taking that. And because they don't, they I mean, if you look at the statistics, the average American cannot come up with cash to cover a $400 emergency. And and so offering something like this an alternative to the security deposits put leave that cash back in their hands they can pay a small monthly fee and then be in a good be in good shape. So we're seeing overwhelmingly people are choosing that option.

BRAD: So the PM gets to reap some benefits in the admin fee per month and then they get thrown into a profit pool that could pay out at the end because it's called a captive insurance company. Am I paraphrasing that pretty well?

ERIC: Yep. Yep.

BRAD: Okay. That helps quite a bit because people are going to be looking at this as a very viable solution, especially when the state and or municipality or even just the market demands it. And if you're looking for an edge in renting your homes or presenting this to your owners as a business development feature, this is a real good opportunity to say we have all these progressive programs that we have implemented into our system that allows tenants to have this benefit, this benefit, this feature, and then it gives you this feature, which is way much gooder, right? It's much better than your old way of doing the security deposits. And a lot of them to the man we start talking deposits. Okay, now we're going to get pat deposits. Now you're going to get deposits for your keys. Well, yes, it's just just full of legal landmines, because if you don't delineate a pet deposit from a security deposit, some shady attorney is going to come along and say, we got you, and again, you're going to be paying out and it's just not worth it. So I really like this option. So talk me through about if somebody has a claim, how is that all going to work? I mean, just just I mean, what if scenario? So the tenant vacates at the end and there's 1000 bucks in damage. What do they do?

ERIC: So tenant vacates at the end there's there's damages. The first thing they would do is send a demand letter to the tenant. If within five days or so they haven't received a response back from that tenant, then they're going to file a claim with the insurance company within 48 hours. We're going to adjudicate that claim and fund via the the claim up to the coverage amount to that property manager. So there's a very tight window that that property manager is going to get their their money. If there's a legitimate claim that the tenant doesn't take care of, then the property manager can take that money. And like I said, they can do with it as they will. They can work with the owner and say, well, do you want me to just send you this money or do you want me to use the money to make some repairs or updates on the property or whatever the case is? They can they can decide how they want to use those insurance proceeds. Because, remember, it's not security deposit that has to follow all of the restrictions of monies that being held as security. It's insurance proceeds so the owner can choose how that money gets used. At that point.

BRAD: To paraphrase the the show office and Dwight, you remember him? Here we go. A question. Question. What if there is a $1,000 worth of damage and only a $500 payout, or let's use $10,000 in damage and a $1,000 payout, is the PM still allowed to go after the outgoing tenant for the balance due?

ERIC: Yes. So the property manager has the has the privilege of going after that tenant for the amount due. Now on the flip side of that, and that's a great question, but on the flip side of that, let's say that there is a payout from the insurance company, that the insurance company has the right to go after the tenant for what they paid out in the claim. So and if the insurance company does that and successfully recovers funds, then those recovered funds are going to go back into the profit pool that the the member of that captive insurance company is going to benefit from in the end. Well, so basically.

BRAD: Is if there's a claim and then there's a settlement, does that make the tenant untouchable? And so your answer is no, it it's not. I mean, you still have the option because I get this all the time with the owners. Well, you're only carrying $1,000 of coverage or 10,000 or 20,000, whatever. What if the tenant does this, this and this? Well, one, if if it's really severe damage, you're probably going to need to file a claim with your insurance company. Right. But to answer your question directly, to not dance around it. Yeah. If the tenant causes more damage than what the insurance is going to pay out, we can go after them. We being you or me, we can hire an attorney, we can hire leg breakers, whatever we're going to do, I can go after that tenant. And so by taking a claim you're not filing or excuse me, you're not settling your rights a way to go after that tenant for any shortages. And that's kind of the answer I want to find out.

ERIC: Absolutely correct.

BRAD: Good stuff, man. This is it's been pretty cool to see how this has come to full fruition because you've been working on this, I think, for a while. So do you have some pretty good success so far? Have you been implementing in certain few number of states so far?

ERIC: Yes, we do. We've had some good success in the operations that we've implemented in and continuing to grow that we really just kind of came to the market last. All and started implementing it then. So we haven't even been out out in public for a year but we've got, got good, good adoption and we're continuing to grow and excited to be able to bring these benefits to property managers, their owners and their tenants.

BRAD: Now, the billing of this, you're billing the the property management company directly, correct?

ERIC: Right. So we're setting up a monthly report or weekly report that comes from the property management system, goes into our system. And then just once a month, we send a bill to the property manager. There have been collecting the premiums throughout the month. As rents come in, they just send us one check. So it's very, very simple, very easy process.

BRAD: Yeah. One of the challenges of implementing this is one, you got to get it into your new lease agreements. That's pretty easy to you want to get it into your existing renewals so the tenants that you have, once the renewal time comes up, then you can offer it to them as kind of like, Hey, you have to do this now, you have to give us X per month and we're going to refund your security deposit. So it's kind of like a neat opportunity there. Then you can also throw it out there to see if anybody wants to jump on it. To all of your existing current lease agreements, even if they're six months, a year, ten years left on them, those tenants can still volunteer to come forward and say, yeah, I want to I want to get my security deposit back and I'm happy to pay 20 bucks a month. Right. And I'm sure there's a limit if they have 6 minutes left on their lease agreement. You guys may want to frown upon that. But, you know, if there are six months left, I think that's probably something you guys probably have guidelines on that. But I'm just talking through the implementation because we've gone through that. Sure. And so it does take a good 18 months, two years to fully implement this process.

BRAD: The process I sound like a British now process to fully implement the process does take some time, but once it's cooking, then it's a really good revenue generator, a very good point of distinction between you and other property management companies. And it gets to be known around town. Like, for example, we have that program, what we're talking about now, we have several other programs like we can do six month lease agreements, we can do month to month leases if we need to. The realtor community, the realtor community starts to hear about all this stuff, right? And they start to bring us more applicants because they're like, Whoa, you guys are doing cool things. You got, you know, minimal down payment. You got six month lease agreements. And my my owners are selling their home and building another home. And so you start putting out those unique programs and the world starts to hear about them. And guess what, gang? We're not doing anything the apartment complexes haven't been doing for years and years. This is this is not we did not create fire with this. This is this is all this is just something we're copying from the apartments.

ERIC: Yeah, Brad, you're so right. And there are so many needs out there in the marketplace for temporary housing, which is what generally we historically, that's what property management has been bought of. I think more and more people are saying, you know what, renting a house is kind of nice. If there's if something breaks, I just make a phone call or send an email and it gets fixed and I don't have to worry about it. So I think we're seeing more and more people choose rentals in long term rentals for for a longer period of time. But it is when we can find ways to bring value to tenants and when we can find ways to bring value to owners, then the word gets out. People in the industry like that and those realtors are more apt to give you referrals and tenants are more apt to stay in your rental property longer and pay their rent on time. And when tenants stay and pay, guess what? Owners stick with you as their management company and everybody wins.

BRAD: It does because if you can get more renewals, obviously it's less chance for an owner to vacate. And also what we have seen is tenants move from one home with us to another home with us because of this program. So it kind of creates a little bit of stickiness, but not not over the top stickiness. But, you know, they come to us first and say, you know what, I had another kid or grandma's moving in and I need to move across town. And I was I just want to rent a home from you guys because you have this program. So it does create a bit of stickiness to it. It's kind of neat to see. So wrapping up this this episode, I think this has been quite a fun conversation. How would somebody get in touch with you to learn more about this program?

ERIC: So our website is the best place to get in touch with us, your orascom. So Renters Insurance Solutions is the name of the company again. Your Orascom is the website.

BRAD: So why you are risky.

ERIC: That's it.

BRAD: Got it. Got it. Go ahead.

ERIC: I was just going to say and we're going to be we're going to have a booth at the broker owner conference coming up in San Antonio. So stop by our booth there and meet Jeff and Greg, my partners in this business. And we'll be happy to talk to you more about insurance and ways that you can serve your owners and tenants better.

BRAD: Yeah, Jeff and Greg. Jeff and Greg Deering, they're brothers. They own a management company or did on a management company up in North Austin. And they're good folks. They've been around forever and ever. Greg was a former regional vice president. Right, or yeah. Of the right organization. So he's been around. An open world forever. Highly respected. He's the one guy in the room wearing a cowboy hat. So you'll always recognize him.

ERIC: That's right. That's right.

BRAD: Well, good. We'll look forward to seeing you at the broker owner conference. I'll be there. It's in the hometown, so it's only a good 40 minute drive from here. It should be kind of cool, and it'd be good to have this in the hometown and and be the local reference to all the cool stuff that we have to offer here in the San Antonio region.

ERIC: And then, Brad, I would be remiss if I didn't also say that in two months we're going to be a vendor at the Con coming up in Las Vegas. So I think you know a little bit about that conference, too.

BRAD: I keep forgetting about it, man. I keep forgetting about it. No, no. We have the Property Management Mastermind Conference coming up in middle of May at the Red Rock Resort in Las Vegas. It should be a fantastic event, the good masterminding stuff that we had the last couple of years. And, you know, we should expect a really good turnout and Red Rocks, a neat facility. So it's going to be a great conference. Looking forward to seeing you guys there as a vendor and should have a fantastic experience. So thanks again for coming on the show. I appreciate your time today and look forward to seeing you at the broker and the PM con coming up. We'll talk to you soon.

ERIC: Thanks, Brad. Great conversation. See you soon.

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ANNCR: This has been a podcast episode by Property Management Productions. Be sure to subscribe to our podcast, leave us feedback and come back for our next episode.

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About The Host

The Host of this Podcast is Brad Larsen from San Antonio, Texas. Brad is the founder and owner of RentWerx, one of the fastest growing residential Property Management companies in Texas that currently manages over 700 single family homes.