Sarah Holder is a staff writer at CityLab covering local policy, affordable housing, labor, and technology.
Rentberry, an online rental marketplace, wants tenants to pay security fees in cryptocurrency and have micro-lenders cover most of the deposit. What could go wrong?
Silicon Valley has long had a fascination with transforming tedious analog tasks into frictionless, touch-screen enabled transactions. Having thusly disrupted taxi rides, banking, and shopping, apartment-hunting appears to be next on the list. Mom-and-pop landlords are slowly being replaced with tech-savvy ones, who use cryptocurrency, Venmo, and other apps instead of rent checks slid under the door. Now the online rental platform Rentberry is promising to reinvent the security deposit, too.
As my colleague Kriston Capps described it last year, “Rentberry turns Craigslist into eBay.” The service invites potential renters to fill out comprehensive online profiles and participate in an auction-style bidding process for housing—the best offer (and the most responsible-looking renter) wins. The company first ruffled feathers in San Francisco last summer, stoking fears that the site could jack up already outrageous rental prices. Company CEO Alex Lubinsky claimed that Rentberry’s approach would save some renters money by driving down prices in areas of lower demand; instead, in San Francisco and San Jose it raised rents by 5 percent. The service grew quickly from its 2015 California roots: Today it lists more than 220,000 properties in 4,948 cities and is used by more than 120,000 people.
Now, Rentberry says it has found a way to make security deposits cheaper for renters, hassle-free for landlords, and majorly profitable for anonymous third parties—all using cryptocurrency. They’ve received $28 million already from pledged subscribers, and their public token sale begins today, December 5.
Rentberry’s deposit scheme works like this: Landlords will now be able to use the platform’s existing online marketplace to charge a security deposit on a property, using Rentberry’s personal cryptocurrency (aptly, if ridiculously, called BERRYs.)
Instead of paying the deposit in full, however, the renters just put down the first 10 percent as a deductible. Then, a “community” of micro-lenders—a crowd that can range from one to thousands of people—foot the rest of the BERRY bill. Those lenders, in turn, charge renters a yearly interest rate, typically between 3 and 4 percent of the deposit. As with a normal security deposit, if the landlord doesn’t note any damage at the end of the lease, the initial deductible is returned in full to the renter, and the rest goes back to the lenders.
Say a rental deposit is worth $2,000. (The average rate on the site is $1,700, according to Lubinsky, but for ease of calculation we’re using a round number.) At the start of the lease, renters pay $200; lenders pay $1,800. Every subsequent month, renters pay the lenders around five bucks. All told, instead of paying $2,000 on day one, renters end up paying as little as $54 over a full year (assuming they get their original $200 back.)
The benefit for renters, the company says, is that it liberates the lost potential of their security deposits. Sometimes renters might have several thousand dollars worth of these deposits “frozen” for years at a time, unable to be spent, invested, or distributed by landlord or renter. (By Lubinsky’s estimation, there’s $500 billion in frozen security deposits locked away in banks now.) For young renters, this lost potential can add up. If the beginning of one’s life as a renter starts the year after college and doesn’t end until you push 40, you’ve squandered two decades worth of the interest-gathering powers of a few thousand dollars. Rentberry says it can free up those assets.
However, the “freezer” into which landlords park security deposits isn’t really that cold: In many states, landlords are required or advised to keep security deposits in an escrow account, where they’re also accruing value in interest (albeit at very low rates). When the lease ends, assuming the renter hasn’t trashed the place, the landlord returns their money in full, minus costs for repairs and plus interest, in those states that require it.
That may be true, Lubinsky allows, but if you’re a landlord, this process is “a pain in the ass”—one that is subject to state regulation. “He or she needs to go to the bank, open a separate bank account, put that money into the account, and then at the end of the rental agreement to return all that cash with interest rate back to tenant,” he said. Rentberry’s system would eliminate much of this bother—and also help lubricate a notorious sticking point in landlord-renter relations.
“Security deposits remain the major reason for filings in landlord-tenant court,” said Steve White, CEO of RentPrep, a tenant screening service that has worked closely with landlords since 2007. They’re “filled with regulation pitfalls and traps” for the landlords, he says, many of whom don’t know about those state laws surrounding escrow accounts until they’re taken to court.
Playing that long game sometimes isn’t possible for unestablished or low-income renters. Most deposits cost a month or a month-and-a-half’s rent, which means that even for cheaper apartments, tenants must pay more than double their rent upfront to move in. Rentberry’s plan has the potential to offer rental opportunities to those who might otherwise be stopped by that high upfront fee, giving first-time apartment hunters a shot in a competitive market. On the other hand, vulnerable renters could more easily find themselves in over their heads, locked into leases on apartments they couldn’t have afforded otherwise.
So what’s in it for the the micro-lenders who are putting up the bulk of the deposit cash, via Rentberry? Crowdfunding is less risky than investing in the stock market, and the 3 to 4 percent interest from renters beats the often sub-1 from the bank. If a property is damaged, it’s funded first by the 10 percent deductible the tenants put down. Rentberry itself gets a piece of the action, too, charging 0.25 percent of the 3 to 4 percent security deposit transaction interest in commission.
Renters who are partiers (or prone to bad luck) might prefer the Rentberry system too, since it doesn’t de-incentivize damage as much as a traditional security deposit: It’s micro-lenders who will eat most of the repair costs if the renters knock a hole in the drywall during an epic rager. Why not pay a few hundred to Rentberry to live without fear of losing a thousand? In that scenario, negligent renters win. (Though landlords can also ding their renters with bad scores.)
Rentberry’s foray into online lending and banking is part of Silicon Valley’s ongoing interest in elbowing into financial technology. It’s an emerging territory made possible in part by the advent of blockchain technology, a cloud-based distribution ledger that facilitates digital currency transfers and financial agreements. Blockchain sounds complicated, but basically it’s designed to make transactions easy, safe, and transparent: Everything done “on the blockchain” is traceable, complete with timestamps and transaction data.
By using blockchain, Rentberry allows landlords to avoid the U.S. banking system and forego escrow accounts, even in states that require them. “The loophole is that we use our own crytocurrency and it’s essentially decentralized,” said Lubinsky. “We are not mandated by law to put it into the bank, because everything is done on smart contracts. It’s not even really qualified as a security deposit because it’s done on the blockchain, not in U.S. dollars.”
The blockchain platform enables Rentberry’s lenders, landlords renters to make secure online trades without ever meeting. “Prior to [blockchain] it would be impossible to execute this in a really seamless manner, because just think about how somebody from China would be able to back somebody in Germany without it,” said Lubinsky. By using digitally traceable smart contracts, lawyers aren’t needed to officiate the signing of documents; nor translators to facilitate communication. Money from every international currency is converted into Rentberry’s own cryptocurrency, which can then be traded at a standardized value.
Steve White of Rentprep sees Rentberry’s disruption as part of a productive paradigm shift in landlord-tenant relations. “We used to see a whole lot more complaints from the tenant side of things—that they weren’t being treated fairly, being ignored, that they had slumlord issues, that landlords weren’t cashing their checks on time, that landlords were... not keeping security deposits in safe places,” said White. “Now with this online technology there’s a layer of transparency there as well. They know what’s going on because they can see what’s happening.”
But transparency doesn’t always translate into legal protections: If a landlord tries to make off with your security deposit, does it matter how clearly you can watch it happen?
That happens often, according to tenant advocates. “It’s almost as if there’s a Landlord 101, and in Landlord 101 one of the things they teach you is how to steal a security deposit,” said David Arenberg, director of the Arizona Tenants Union, which helps Arizona renters with landlord disputes and refers them to attorneys. “I mean, that’s what landlords do!” (Rentberry has begun doing business in Phoenix, but to his knowledge, Arenberg hasn’t yet spoken with tenants who have used the service).
Lubinsky says the same rules apply online as they do in face-to-face landlord-tenant relationships: Stealing cryptocurrency is just as illegal as stealing cash, and tenants can sue. But with multiple parties involved, the lines between plaintiff and defendant get fuzzy. “Let’s say it’s a $2,000 security deposit, the tenant puts down $200, and the landlord claims there’s $1,600 worth of damage,” said Arenberg. “Who litigates that?” Does the tenant sue for their $200, or the micro-lenders for their $1,400?
With so little at stake, Lubinsky predicts neither will. Each micro-lender is spreading their wealth across multiple properties, meaning their share in any one will typically be only $1 to $5. He doubts renters will spend the time or money to lawyer up for such a small payoff, either. “It won’t be too efficient.”
Instead, Lubinsky suggests tenants write reviews, “so future tenants can know that this actually happened. It’s a system that will penalize the landlord and in the future they’ll have a hard time renting out his or her properties.“ The tenant’s $200 is lost, but their frustration can live online forever.
Arenberg doubts that such self-policing would be effective, however. “Negative reviews do not deter landlords from stealing security deposits,” he said—unless landlords primarily use one site (like Rentberry) to find tenants. “[That] would have more of an insurance effect,” he said.
Renters, too, are subject to reviews and ratings, as well as credit scores, eviction history, and an intensive risk-level assessment based on evaluations from third-party companies, Lubinsky says. “There’s lots of analysis that goes into what kind of friends you have, what kind of comments you leave,” said Lubinsky. “So they can filter out potential bad people like terrorists and things like that based on those things.” If renters have a low score, poor ratings, or a “high risk” ranking, lenders will either avoid backing their future deposits, or lend at higher interest rates.
Holistic evaluations like these may be more illuminating than credit scores: Renters who have defaulted on card payments in the past aren’t necessarily more likely to incur major damage on a house, and vice-versa. But using Facebook friends, pictures, and personal online activity as a filtering mechanism can also open the door to profiling; allowing lenders to avoid backing deposits based on the race of the renter, for example. As real-estate transactions migrate online, so too have racially discriminatory practices that have drawn comparisons to redlining. (ProPublica recently reported how Facebook sold real estate ads that specifically targeted non-black and Hispanic users.) While not always enforced intentionally, these dark side effects can be the unfortunate byproducts of unregulated online markets.
“Everything is based on personal relationships and negotiations, just like nowadays,” said Lubinsky, who’s convinced that, in the end, services like Rentberry will be a positive force. “When you’re looking at the long-term rental space, it opens up a global effect where people around the world will be able actually to go in and help other individuals…unfreeze that capital and use it for something good.”
CORRECTION: An earlier version of this post misspelled David Arenberg’s name.