The handling of security deposits is a common source of landlord tenant disputes. Unfortunately, many times these disputes must be settled in court.
To avoid the unnecessary stress and expense of a legal battle, watch for these common mistakes:
1. Charging too much. The amount of security deposits is regulated in the majority of states. That cap is generally between one and two months’ rent. Check the security deposit statute in your state before collecting a deposit, or you could wind up owing your tenant money out-of-pocket at the end of the lease.
The safest practice is to charge the same deposit figure for all tenants. Do not increase the deposit because of children or other subjective “risk” factors that could be viewed as discriminatory.
2. Equally problematic, some landlords don’t charge enough for the deposit, or allow installments. This may be a holdover from the days when the rental market was stagnant. Back then, landlords sometimes would waive the deposit or offer a very low deposit as a rent incentive.
This is not a viable option, especially now that the market is stronger. A tenant who cannot afford the deposit may not be qualified for the rental. Also, the allocation to the deposit versus rent payments can be confusing for the tenant and difficult to enforce.
3. Pet deposits are tricky. As a general rule, the funds designated for pets can only be used for that purpose. Therefore, the best strategy is to designate as much as possible to the general deposit without going over the legal limit. Not only does the general deposit cover pets, but it covers everything else. Do not reduce the general deposit in favor of a pet deposit. Use a pet deposit only if it will be cumulative — allowing you to collect more than the allowed general deposit.
4. Returning the deposit too early. Never return the deposit before the final walk-through, and conduct the final walk-through only after all the tenants’ possessions are removed from the unit. Some standard lease agreements provide a time when the deposit is due to be returned. This may conflict with your local law by forcing you to return the deposit sooner than legally required.
If a tenant is pushing for an early return of the deposit, it may be because they know something you don’t.
5. Don’t divide the deposit for roommates. With more and more millennial renters in the market, landlords are likely to see more requests for roommate shares. Notoriously transient, the more roommates in the unit, the more likely at least one will need to leave early to pursue a new job or other life change. Remember the roommate mantra: All for one, and one for all! One tenancy. One lease. One deposit — regardless of how many occupants.
If a roommate needs to leave and you refund a portion of the deposit, that may hamper your efforts to collect against the others for damage that occurred while the former tenant was present.
Having a roommate withdraw and move out has legal consequences, and may terminate the lease agreement. Speak with your attorney to learn how to protect your legal rights in this situation.
6. Deductions need to be accurate. Never pad the bill or round up on charges that will be deducted from the deposit. Judges view this practice negatively, and even associate it with stealing. Landlords who do this as a common practice may soon find themselves the target of a class action lawsuit comprised of any number of former tenants. Such actions can trigger consumer protection penalties, such as triple damages awards.
7. Not prepared to prove losses. If a tenant complains about the security deposit deductions — and many do — you will need to show your accounting. In a recent court dispute, a judge suggested that receipts speak louder than photos or words.
Conversely, a tenant who has been provided receipts is less likely to dispute the deductions, and a tenant’s attorney may be reluctant to go to court if the figures appear reasonable.
8. Good accounting — it’s the law! Along with capping the amount to be charged for a security deposit, many local landlord tenant laws require both regular and final accounting of the security deposit. This is the reason for requesting the exiting tenant’s forwarding address. In state’s that require interest on deposits, that figure typically must be reported to tenants.
In many states, deposits must be kept in special accounts separate from the operating account.
9. There is no such thing as a “nonrefundable” deposit. A deposit, by definition, is something that is returned. Sometimes landlords will use this language to camoflauge an add-on fee, maybe for pets or early termination. However, this language is confusing, and often smacks in the face of local landlord tenant law. If your jurisdiction does not allow charging extra fees, calling it a deposit will not save you. What’s more, it confuses tenants, who believe that the money will be returned.
10. Don’t call or treat the deposit like “last month’s rent.” It is not in a landlord’s best interest to apply the deposit to the last month’s rent, because that is equivalent to waiving the security deposit thirty days before you inspect the property for damage.
The lease must be crystal clear when it comes to designation of all funds, whether it’s an application fee, a deposit, or a rent advance.
A common practice is to collect the first month’s rent in advance, along with a security deposit. Just because the deposit is the same amount as the “last” month’s rent does not mean it can be applied that way — just make sure the tenant understands that reality.
LANDLORD TIP: Security deposits can be an effective tool against property damage and losses, but only if tenants believe that the deposit will be returned in full. Perform inspections throughout the term of the tenancy, and in particular about a month before the end of the lease. That provides the opportunity to discuss what the tenant must do in order to get a full refund. The deposit is best employed as an incentive. After an inspection, encourage tenants who are doing a good joy, and educate those who need to step it up a notch.
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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.