What is a damage deposit?
Sometimes referred to as a security deposit, a damage deposit is the refundable sum of money which a property owner collects from their guests in addition to the total booking amount.
This deposit guarantees that the guest returns the property in the same condition they found it. In case any damages occur, the property owner will make appropriate deductions from the damage deposit.
Charging a damage deposit is a very common practice in the vacation rental industry. Deposits encourage travelers to feel more responsible and accountable during their stay, while simultaneously providing extra protection for hosts on top of their home insurance.
How can owners calculate damage deposits?
Each vacation rental property is different and, as a result, each host will have different preferences on how to calculate the damage deposit. In the short-term rental industry, there are typically three main methods used to determine the damage deposit amount.
1. Flat amount
This is the method of defining a fixed fee deposit to charge to all incoming guests, regardless of the length of their stay. In general, the security deposit is around $250 in the United States, €250 in Europe or £250 in the United Kingdom.
On some occasions, such as for stays of longer than one month, owners may charge the equivalent to one month’s rent for the damage deposit. Equally, for short stays of one or two nights, they may decide to set a smaller deposit fee.
2. Percentage of booking
This is the method of defining a percentage of the total booking amount to set as the refundable damage deposit. In most countries, vacation rental bookings are subject to a 10% damage deposit.
Charging a percentage of the booking total can be particularly advantageous for hosts looking to attract short-stay guests. This is because when using the flat amount method, the damage deposit may almost be as much as the booking itself. By charging a percentage instead, this amount is not a barrier for the guest to complete their booking.
3. Flat amount or percentage of booking
This is the method whereby, depending on the booking total, hosts charge either a fixed, flat amount or a percentage. The greater amount of the two will be the final damage deposit figure. Usually, the property manager’s software will calculate this amount automatically.
This option is beneficial for hosts who see a wide variation in the length of their guests’ stays, as it automates the process of having to calculate the deposit for each booking manually.
What methods exist for collecting and charging damage deposits?
There are a number of approaches owners can take to collect and charge security deposits for their vacation rentals.
1. Manual charge and refund
Some owners prefer to accept cash or check payment for the damage deposit. This is commonly referred to as a manual charge and refund as the owner is responsible for handling the funds themselves.
When using this method, the property owner will hold the funds during the guest’s stay.
Manual damage deposits can pose a number of pros and cons for property owners and travelers alike.
Pros of manual charge and refund:
– Hosts receive the funds either before the stay begins or immediately at the time of check-in. In most cases, they will return the full amount to guests upon check-out.
– Quicker to refund the deposit, meaning the traveler leaves their vacation already knowing there isn’t anything for the owner to dispute.
Cons of manual charge and refund:
– Collecting cash for the damage deposit means the owner has less time to verify the property is in the correct state upon check-out.
– Rushing through the property inspection can make it harder to challenge anything at a later date. It can also provoke heated in-person discussions in case of discrepancy, which can, in turn, lead to negative reviews.
– Depending on the deposit sum in question, it may be a big inconvenience for international guests to bring an additional amount of foreign currency that they will have to exchange again once back home.
2. Credit card pre-authorization
The credit card pre-authorization method is very convenient for vacation rental owners who need to protect their property from damage.
Pre-authorization works by putting a temporary hold (blocking the amount but not charging) on some of the funds available on the traveler’s credit card. While there is no charge to their card, a pre-authorization means they will not be able to access these funds either (i.e. withdraw that amount from an ATM or spend it elsewhere). Therefore, the property owner can guarantee that there are sufficient funds available to cover any damage incurred.
When using this method, the payment gateway puts a temporary hold on the funds. As a result, the owner does not handle any money directly.
There are many advantages and disadvantages to using this method for damage protection.
Pros of credit card pre-authorization:
– Makes sure that owners have a viable way to charge guests for damage. Rather than releasing the full amount, having the pre-authorization means the owner can capture funds (charge guests) from the security deposit for breakages.
– Prevents travelers from disputing transactions or issuing chargebacks, as the funds have not actually been captured.
– Prevents booking fraud as it reduces the possibility of guests reserving with stolen credit cards.
– Avoid refund fees: many payment gateways charge a fee for refunds. To release funds from a pre-authorization, the owner can simply cancel or void the hold through the credit card processor. As no payment has been captured, there is no need to issue a refund.
Cons of credit card pre-authorization:
– The pre-authorization expires relatively quickly. In most cases, pre-authorizations expire in five to seven days.
– The time a pre-authorization remains on a credit card can depend on a number of different factors, including card provider, issuing bank, payment gateway, etc.
– For bookings of one week or longer, owners will likely need to renew the pre-authorization. This means voiding the existing pre-authorization and issuing a new one. While this can be a slight inconvenience, it does not deter most travel or rental providers from using this method, since it is one of the safest and easiest ways to collect damage deposits.
3. Damage protection insurance
An alternative to collecting deposits manually or pre-authorizing a credit card, damage protection insurance is becoming an increasingly popular choice for vacation rentals professionals.
Damage protection insurance is a product that the traveler purchases – usually during the booking process. The one-off cost of buying this insurance is typically around $50 to $100 per trip.
When using this method, the insurance provider receives a non-refundable payment for the product, purchased by the guest.
There are many pros and cons to keep in mind when selecting property damage protection insurance.
Pros of damage protection insurance:
– Can increase guest trust – they may be more willing to report any accidental damage if they’re already confident the plan covers it.
– Can drive more bookings, as some guests prefer to pay a small fee upfront, rather than leave a substantially larger amount for a security deposit.
– From an owner’s point of view, insurance can offer greater protection than a damage deposit. In general, the coverage limit could be up to 10 times more than the average damage deposit.
– The owner incurs no costs for this type of protection. Guests simply pay for their insurance while making their reservation.
Cons of damage protection insurance:
– In order for an insurance claim to go through smoothly, the guest in question has to admit to the damage.
– The damage must be unintentional.
– Theft, vandalism or damage which is in violation of the rental agreement will likely not be covered under the policy.
– It can sometimes encourage disrespectful or reckless guest behavior. Some guests may view the fact they’ve paid for insurance as their “free pass” to not take good care of the property they rent.
Returning damage deposits
Depending on the method the owner users to collect the damage deposit, there are different ways to release funds to guests.
In case of check or cash payments, this can be as simple as returning the money in an envelope or ripping up the check.
With credit card pre-authorizations, once the property owner settles any damage, they can void the pre-authorization on the credit card. This will release the funds back to the cardholder, once again making them available.
Damage deposit disputes
Property managers have a responsibility to inspect their vacation rental for damage regularly, both before guest arrival and after their departure. This will make it easier to pinpoint when damages happen and, as a consequence, know when it’s necessary to withhold part (or all) of the security deposit amount.
That said, it is essential for owners to be aware of what is considered normal wear and tear for their property. Every property requires periodic maintenance and it is unfair to expect these costs to come out of the guests’ damage deposit. Some items simply wear out due to natural use and, therefore, the owner should cover these expenses. For example, replacing cutlery or tableware, applying a fresh lick of paint to chipped walls or fixing a leak in the bathroom.
In contrast, if a guest breaks a new appliance or spills nail varnish on expensive flooring, it is acceptable to retain some of the damage deposit for reparation or extra cleaning. This is known as a dispute.
Withholding money from the damage deposit
Charging a damage deposit should never be a profit-boosting tactic or a way to make additional money from renters. Withholding a deposit maliciously or out of spite can cause more problems in the long run and even harm a business’ reputation.
In case the need to use the damage deposit amount to repair or replace items arises, hosts should:
– Identify the damage before charging or releasing any funds
– Collect evidence in the form of inventory documents, check-in/out inspection notes and photographs/videos
– Gather invoices, receipts and estimations which clearly illustrate the reparation costs.
Avoiding damage deposit disputes
In many cases, it is possible for both parties to avoid damage deposit disputes. For property owners especially, having a realistic expectation about the condition of the property before a guest arrives can help better determine whether they are at fault for the damage.
A lot of disputes are preventable by setting up the correct process before launching a short-term rental business. This means:
– Having all guests sign a rental agreement before check-in
– Clearly outlining the property’s house rules and repercussions in case of breach
– Completing the check-out inspection with guests when possible
– Keeping records of any written communication regarding property damage.
Disadvantages of damage deposits
Although travelers are generally familiar with and accept the use of damage deposits for their vacation rental stays, there are some drawbacks.
Damage deposits may deter guests
Most travelers compare various vacation rentals before making a decision. If during the research phase, they come across two perfectly suitable properties but one has a much higher security deposit, this can be a deterring factor which sways the booking in favor of the competing property.
While this can be a concern for property managers, in general, responsible guests will not take issue with damage deposits. In fact, damage deposits can even work to discourage unsuitable or irresponsible guests from making a reservation.
Disputes can cause difficulties
When property damage occurs, it can cause an awkward conversation or situation between property managers and guests. If the guest doesn’t openly admit to the damage, it can be hard to proceed or withhold money from the deposit as it’s one person’s word against the other’s.
However, if they do admit to the damage, but they don’t agree with the amount you are charging them for repairs, this can also be problematic.
It’s important to write up a statement which shows that both sides are in agreement with the charge and provide evidence accordingly.
There are many things to take into consideration when thinking about using damage deposits and protection. Such as:
– How to calculate the deposit amount
– How to collect and charge the deposit
– How to return damage deposits
– How damage deposit disputes work (and how to avoid them).
Overall, security deposits, pre-authorizations and damage protection insurance are three very valid methods for protecting short-term rentals against damage.
There is no “right answer” regarding which of these will work best for any particular vacation rental business.
But there are some guidelines which we think can help make the decision easier:
– If the owner does not like to take risks and prefers having no issues with being able to charge guests in case of damage: collecting a security deposit could be a good option.
– If the owner is looking for convenience and a smooth damage protection experience: credit card pre-authorization would be an excellent choice.
– If the owner does not want to worry about damage to their property and prefers to have comprehensive cover for any potential situation: purchasing damage protection insurance may be a suitable plan of action.
Above all, there is a need to handle damage deposits professionally and rationally for the best results and guest relationships.