Security deposits are a double-edged sword. On the one hand, they are an indispensable tool in restoring a unit quickly. They help in tenant screening by raising red flags — like, if a tenant can’t afford a deposit (may not be income qualified) or won’t pay one (lost the last deposit, doesn’t plan to stay).
On the other hand, holding onto someone else’s money is risky business. It soon can become a legal quagmire, and a landlord can wind up losing on the deal. These are three common mistakes that can lead to landlord income loss:
Security Deposits Have Limits
Provincial law spells out the specific limits regarding how much a landlord can charge for a security deposit. That could be nothing (sorry, Ontario) or a figure that is tied to monthly rent. Some landlords can charge separate amounts for pets, others can’t. Collecting more than the legal amount can result in penalties, so it’s crucial to check the provincial Residential Tenancies Act, ask your local landlord association for guidance, or enlist the help of a legal expert if you are not clear on your responsibilities.
There’s No Security in Security Deposits
Another costly mistake is believing that the security deposit will cover potential losses. Existing limits can be as low as one-half of one month’s rent. That will cover some, but certainly not all the damage that could be caused by a bad tenant. Security deposits are not a safety net against destructive renters.
Effective tenant screening is still the single most effective way to protect a rental property from damage.
If you find that you are reaching into security deposits on a regular basis, it may be time to review your tenant screening practices, and look for ways of attracting tenants who want to earn their deposits back.
Security Deposits Are Not a Profit Center
Applying funds from a security deposit is a two-tiered proposition. First, landlords must show they are legally entitled to take deposit funds. That requires proof that the tenant caused damage beyond ordinary wear and tear. Then, landlords must prove the specific amount to be deducted.
One of the most costly mistakes a landlord can make is taking “standard” deductions from every tenant that comes along. Another risky strategy is padding or rounding up the figures so the landlord makes a little bit more for the trouble.
Every landlord needs to keep accurate, contemporaneous records of expenditures that will be reimbursed from a tenant’s security deposit. In many cases, these documents will be shown to a tenant-friendly arbitrator who will determine if each line items appears reasonable. Examples of such records may include:
The completed and signed move-in inspection condition report;
The completed and signed move-out inspection condition report;
Estimates or bids from reputable contractors; and
Receipts for products or services needed to restore the unit to move-in condition.
Line items that are padded or unsubstantiated may be rejected. Each time that happens, the landlord’s credibility suffers. That can result in an avalanche of income loss, where the judge or arbitrator denies the deductions altogether, or requires the landlord to pay a monetary judgement to the offending tenant.
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.