The joy of renting a new apartment also comes with misery: Handing over a large sum of money to the landlord for a security deposit, which then sits useless in an account, earning virtually nothing. Not only do tenants dislike that payment ritual, but — and this may come as a surprise — so do many landlords.
In a new PYMNTS podcast interview with Karen Webster, brothers Omri Dor and Roey Dor, who founded a company called Obligo, talk about why they think the latest technology and credit-scoring methods can help change how security deposits are done. The payment product they have developed is undergoing beta testing with select landlords in New York City. The general idea is to get rid of those up-front security deposits altogether, which generally cost at least one month’s rent, with higher fees charged to tenants with low credit scores — who are, otherwise, considered a bigger risk or who are renting in high-priced markets.
“Deposit-free living makes the property more appealing to tenants,” said Omri Dor.
That goal is a story about using payments technology and financing to disrupt a transaction method that can seem ancient in the 21st century — or excessively burdensome to, say, young professionals trying to find a way into the big city. It’s also a story about using digital technology to reduce the administrative tasks that all landlords face.
Go ask a landlord about security deposits and odds are favorable that you’ll hear complaints about the hassle of managing them. Laws generally require that security deposits are kept in separate accounts, for starters, and that landlords maintain financial and tax records for them, as the brothers told Webster during the recent interview. Depending on the state or city, landlords might be required to write out checks to tenants to refund the miniscule interest earned by those deposits.
In short, security deposits often serve as a “pain point,” not only for new tenants but for people who manage apartments, Omri Dor said.
To get around that, Obligo assumes the risk that security deposits were designed to cover, and maintains the credit facilities that pay back landlords for damages that are the responsibility of the tenant.
For a tenant who would want to take part in the program, the company would run a credit risk profile that would determine how likely that renter would be able to pay for such damages. That risk determination, along with the price of the apartment, would govern how much the tenant pays to Obligo for its deposit-substitution product. Obligo’s starting price stands at about $10 per month, assuming the tenant is “high quality,” for $2,500 worth of protection. The money goes from the tenant to the company, not the landlord.
That’s not insurance, the company founders said. It’s a credit product — though one can be forgiven if it appears at first glance like a form of subscription eCommerce. If a landlord makes a claim (say the tenant, in a fit of drunken rage, punched a hole in the wall and failed to repair it), Obligo first pays the landlord out of the company’s credit line. Obligo would then charge the tenant, per the agreement between the renter and the company, with an installment plan possible — a method the brothers said is similar to a credit card.
“There is a marginal risk” that Obligo will lose money on such a transaction, Omri Dor said, adding that his company is engaged in a “low margin, large-scale business.” The data analysis that results in the credit assessment makes it possible to charge those seemingly low prices.
“The technology is there,” he said. “There’s a better way to do this.”