How do you avoid rental losses? Most landlords will answer, “Ask for a security deposit.”
Having the right to deduct repair costs or unpaid rent directly from a tenant’s funds is an efficient way to restore a rental property and quickly get it back on the market. However, there are hidden dangers associated with security deposits that some landlords don’t discover until it’s too late.
Security Deposit Laws are Full of Traps
It may seem surprising, but by collecting security deposits, landlords are increasing the risk for income loss. That’s because security deposits come at a price. That price is government regulation regarding the management of these funds. If a landlord deviates from the laws, that landlord could wind up owing the tenant money, even where the tenant caused damage.
Local landlord tenant law may dictate everything from the maximum deposit allowed to the number of days the landlord has to account for reductions, and what items can by deducted. Stiff penalties, like double or triple the deposit, may apply if the landlord fails to follow the letter of the law. A landlord who simply takes too long to return the unused portion of the deposit could experience these losses.
Security deposits greatly increase the likelihood of a landlord-tenant dispute. Tenants who disagree with the deductions can drag the landlord into court, where they will have to justify their actions. The tenant is allowed to raise all sorts of concerns about the tenancy, like bedbugs, finicky appliances or the landlord’s slow repair record, in order to win an offset against those deductions.
Larger landlords run the additional risk of class action lawsuits or claims of consumer fraud when bad security deposit policies have been applied to a number of tenants.
Security Deposits Create a False Sense of Security
A more insidious danger from security deposits is the false sense of security that deposits provide. That may prompt a landlord to take shortcuts in tenant selection and tenant screening. In reality, the allowable security deposit is seldom enough to cover the catastrophic losses that come from choosing the wrong tenant.
Landlords Can Avoid Hidden Losses
Fortunately, these losses can be avoided. Rather than relying on the security deposit to shore up losses, landlords should:
1. Take care in screening tenants, as though there is no deposit to fall back on. When screening tenants, eviction and credit reports are instrumental is flagging someone who may have caused damage that exceeded the deposit or failed to pay rent in the past. When speaking to previous landlord references, ask if the security deposit was tapped to cover damage or unpaid rent.
2. Become familiar with local security deposit law. Devise a way to keep up with changes to those rules, like participating in a local landlord association or networking activities.
3. Account for every aspect of the deposit, beginning with a receipt for the funds. The lease should clearly state the amount designated for the deposit, delineated from other fees collected.
4. Deposit deductions require both a move-in and move-out inspection and corresponding condition reports.
5. In addition to the move-in/out condition reports, proper documentation is the only way to win a security deposit dispute. Receipts are critical as some judges won’t accept informal notes or estimates. A solid, contemporaneous accounting system adds credibility.
Deposits are a helpful tool, but not the end-all solution for minimizing income loss for landlords. To do that, you must maintain a strong tenant screening policy that includes a credit check, eviction and criminal history and previous landlord references.
This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).
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Disclaimer: The information provided in this post in not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.