There are pros and cons as to the decision of collecting a security deposit vs. damage waiver. Perhaps the largest fear of any vacation rental owner is being left to pay for damage caused by a guest. Luckily there are ways to protect yourself.
What is a Security Deposit?
A security deposit is an amount paid up front to the owner or property manager. This amount is held as security should the tenant cause any damages to the property or steal any items in the property.
The amount of the deposit can range from as low as $100 to as high as several thousand, though a standard amount is typically around $500.
What is a Damage Waiver?
A damage waiver involves the guest paying a relatively small, non-refundable fee that covers property damage up to a certain amount. The owner or guest would submit a claim to the damage waiver provider in the event of damage.
Pros of Security Deposits
You Control the Amount
The property owner can collect whatever amount they deem appropriate for their property. You might settle for as little as $150 for a small condo or as much as $2000 for a more expensive home. The owner is in control.
Collect your Money Upfront
The security deposit is typically collected when the guest books or at some point before their stay. The owner can then withhold all or part of the security deposit, so there is no waiting to be reimbursed.
Guests Tend to be More Respectful of your Property
It is human nature for people to do the right thing if they have something on the line. The possibility of losing all or part of their security deposit should cause guests to be more respectful of your property and your house rules.
Security deposits can Cover Almost Anything
Any bonafide expense can usually be withheld from a security deposit. This can include damages (intentional or accidental), reimbursements for missing items, excess cleaning or penalties for breaking a house rule such as no smoking. Laws can vary from state to state on how you should handle the collection and withholding of security deposit funds, so be sure to do your research.
Cons of Security Deposits
They Can be Time Consuming for you
The process of collecting a security deposit can be very time consuming. First you have to collect the deposit. You should already be doing a property inspection before and after your guests’ stay, but you will need to have a process in place for refunding/withholding funds depending on the situation. This can get complicated if you own several vacation rentals or do a high volume of bookings.
They Can be Inconvenient for your Guest
Most guests prefer to get online, do their research and complete the booking process in a few minutes. Arranging a separate payment for your security deposit can slow things down. This is especially true if you require your guests to mail a check for the security deposit. Most guests will simply not want to use that much effort when booking a vacation rental.
They Can Make your Vacation Rental Cost Prohibitive
An extra $500 charge in the form of a security deposit (even though it is refundable) can make your property seem more expensive. Your guest might just decide to book with a competitor that offers a low one-time fee in lieu of a large security deposit.
Deposits can Make Guests Feel Uneasy
It is a scary thought for guests to hand over that much money to someone they do not know, with the promise that they will get their money back if they take care of the property. This is one way that security deposits can actually deter guests from booking your vacation rental.
Deductions can Cause Friction with Guests
Unfortunately this is one of the biggest considerations when debating security deposit vs. damage waiver. Withholding part or all of your guest’s security deposit, should the need arise, can do serious damage to any future relationship with that guest.
Your guest may feel that they did not cause the damage you have noticed. Things can get very heated when this occurs. You can certainly expect no future business from this guest at the very least. This situation can also lead to negative reviews of your property, whether you are in the right or not.
More Susceptible to Charge-backs
This applies when you have collected the security deposit as a charge to the guest credit card. Your guest can simply dispute this amount with his credit card company if he does not agree with your assessment of the damages. If you have never been involved in a credit card charge-back, let me tell you that the burden of proof is on the merchant. Merchants will quite often lose this battle unless they have a mountain of evidence.
Pros of Damage Waivers
Less Disputes with your Guests
This is perhaps the biggest pro for me when choosing between security deposit vs. damage waiver. You will no longer have to endure the fighting with your guest who claims that they did not cause the damage. There is no reason to bicker about accidental damages since there is no refund involved, although they should still report any damage to you before checking out.
Most guests Prefer Damage Waivers
Research has shown (and this has been my experience as well) that most guests prefer a small one time fee for a damage waiver as opposed to a large security deposit. The cons mentioned above illustrate why this is often the case.
There are Numerous Quality Service Providers
The rapid growth of online bookings through Vacation Rental Listing Sites has led to a large number of service providers that can facilitate the purchase of damage waivers. Do some research and find a reputable damage waiver protection company that is right for you and your vacation rental.
You can Often get a Higher Level of Protection
A typical security deposit is usually around $500. A damage waiver can easily provide up to $5000 worth of coverage or more. You may not think you need that much protection, but think about how much it would cost to replace that fancy flat screen TV or expensive sofa in your living room.
Cons of Damage Waivers
You Have to Wait to be Reimbursed
The claims process for damage waivers involves submitting receipts or invoices and getting reimbursed after the work has been completed. This can be a bit daunting for some owners, especially for major repairs or large purchases.
They Don’t Cover Everything
Damage waivers typically cover accidental damage only. Intentional damage or vandalism, stolen items and excess cleaning are usually not covered items. Another common item I have seen that is usually not covered are penalties for smoking in your property. Most rentals do not allow smoking and the cost to get rid of the smell can easily cost hundreds of dollars.
Pet damage is typically covered if the property is pet friendly and the guest is not violating the rental agreement by having a pet in the property.
The Claims Process can be Time Consuming
A damage waiver is, after all, essentially an insurance plan protecting against damage caused by your guests. Don’t be surprised if you run into some resistance when you finally need to file a claim. The larger the claim, the more hoops you will have to jump through.
Different providers also may have different policies as to who is the named insured and who can file a claim. Make sure you are listed as a beneficiary/interested party so that you can file a claim without having to rely on your guest to do so.
They Can Lead to More Damage to your Property
This is not the case with most renters, but some guests may feel entitled to not treat your property with the respect it deserves since they have already purchased a damage waiver. You no longer hold the proverbial carrot in front of them in the form of their potential lost deposit. This can eliminate the incentive for renters to be on their best behavior.
Conclusion
The choice of security deposit vs. damage waiver ultimately comes down to your own circumstances. Most owners go the route of charging their guest a security deposit and this works well for them. If you only have one vacation rental or do not have a huge number of bookings annually, then a security deposit probably is your best option.
If you do collect a security deposit, then I strongly encourage avoiding credit cards. Your guest can mail you a check for their security deposit or even give you cash when they check in.
Personally my vacation rental management company has been using damage waivers for several years. We manage over 100 properties and simply do not have the time the charge and refund every single guest. I also prefer how damage waivers can help maintain the relationship with your guest for honest accidents.
