Security Deposit or Insurance: What’s Best For Your Vacation Rental?

Erin Colbert —  January 23, 2013

Property Damage ProtectionWhether someone trips and breaks a dish over dinner or one of your guests throws a wild party, it’s almost inevitable that at some point, your vacation rental will suffer some damage.

Because of the near-inevitability of this, security deposits are a routine part of rental transactions.

Typically half the rental fee, a security deposit — also called a damage deposit — is typically collected by check or credit card and held until after the guest leaves and you or your housekeeper has had a chance to do a final inspection. Any damage or extra fees (e.g. additional cleaning) can then be deducted against the amount; any remainder is then refunded.

It’s a pretty straightforward process. However, deposits and deductions can also be a source of contention for two reasons:

  • Often around $500, it’s a significant amount of money that’s paid upfront and held for a long period of time with no benefit to your guest, and
  • Owners and guests sometimes disagree about whether a deduction is justified, leading to disputes, bad feelings, and even cancelled transactions.

Security deposits can also create a fair amount of work for owners between collecting, deducting and refunding various amounts. Beyond that, some jurisdictions have requirements or timelines that need to be followed; for example, vacation rental owners in Hawaii have 14 days to make a claim against a damage deposit.

Is there an easier way? Some vacation owners think so.

Vacation Rental Property Damage Protection

Introduced several years ago, property damage protection insurance offers an alternative to security deposits; instead of a deposit, owners can offer renters the option of purchasing an insurance policy that costs significantly less — under $100 for the policies offered through HomeAway.

Less hassle for greater coverage is an option that appeals to many owners. In an interview with Bloomberg, Flipkey founder T.J. Mahony said half of owners using the FlipKey listings site offer the non-refundable insurance instead of deposits.

However, one owner on HomeAway noted the importance of understanding what the tradeoff is: “Some things that are NOT COVERED: Extra guest fees; Smoking or Pet Fees; Excessive Cleaning Fees; Violation of the Rental Agreement; Loss of Rental while repairs are taking place. So DO GET a Security Deposit or Credit Card for these risks.”

On another HomeAway thread, several owners explained that replacing the security deposit had changed guest behavior. “I think having the security deposit really motivates renters to leave your home in the best condition possible because they want to be sure they get all of their money back,” noted one person. “Aside from filing a claim for some real damage, the insurance doesn’t do that.”

Another said they’d had a very negative experience with switching. “Our damages from guests have gone up considerably since we started this program.  I will be going back to collecting Security Deposits after this last group with insurance has finished their stays.”

That said, HomeAway did a survey that found “75% of renters prefer a small, non-refundable cost over a larger refundable damage deposit.” Giving renters the option to purchase insurance could help distinguish you from the competition as long as you’re comfortable that the coverage won’t leave you feeling exposed.

If you’ve replaced your security deposit with an insurance package, did you have a positive or negative experience?

Erin Colbert

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Marketing at MyVR.com. I help vacation rental owners improve their online marketing efforts and get more inquiries & bookings as a result. You can find me on Twitter and Google+.
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4 responses to Security Deposit or Insurance: What’s Best For Your Vacation Rental?

  1. I have never collected security deposits but instead purchase the damage protection through homeaway on each guest. I have never had a problem and my guests feedback is that they often choose my place over another because they do not have to pay that extra fee. I wouldnt do it the traditional way because of the hassle of holding the money and then refunding etc. Too much work for me and an inconvenience for my guests. I am a big fan of the damage protection!

  2. I tried the Homeaway plan and two things happened: more damage and less covered. With a $250 security deposit we have had very little damage, rarely any extra cleaning. With the $49 homeaway plan, when I needed extra cleaning (beer bottles everywhere, beer in the carpet) and the shower was ripped off the wall it was a major hassle to collect, so much so I gave up and went back to collecting the $250 and have not had a problem in 2 years. I keep their credit card # in case a TV walks away but its never happened.

  3. As a renter, I feel uncomfortable leaving a security deposit. As a VR owner I do not enjoy the extra step of collecting and refunding security deposits. I also don’t want to charge guests “property damage protection.” It’s just one more fee, seems excessive, and may make guests less concerned about causing damage since they know its “covered.”

    Last year I added the following statement to my rental agreement and thus far it’s worked each time I’ve found damage (3 times so far).

    “The owner does not require a damage deposit as the majority of guests treat the property respectfully. If damage is discovered or excessive cleaning is required after renter checks out, renter agrees to reimburse owner for the cost of repairs or extra cleaning.”

    Upon finding damage or a huge mess, I write an email describing what was found and the costs involved and offer the guest an opportunity to explain. I never charge excessive amounts, just exactly what the cost is for me. Each time they have apologized and agreed to pay the extra cost.I send them an invoice via VRBO and they pay online.

  4. Simple question (which we already know the answer to): Why on earth would a renter choose to PAY anything (non-refundable fee for insurance) when they can put a deposit down and get it back… unless they are planning on trashing the place?

    Also, what if insurance doesn’t cover that particular damage (I’ve heard of this happening).

    I agree, there are SO many other reasons to take a deduction from a deposit besides damage. A number of times, after they’re arrival, the renter asked to stay an extra day. In these cases they had paid by check (and deposit by check). We removed the additional day rate from their deposit (which was big enough to still cover any damage). Other times we just charged their credit card as we already had it on file for the rental and deposit (which we places as a hold on the card). We’ve already ran the card twice, so we know it’s a legit card!

    Also, if you have their credit card number, you can easily charge for other additions (late departure, last minute boat rental, more towels, etc.).