Avoiding The Security Deposit Blues

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As a property manager or landlord the largest risk of lawsuits exists around issues with the security deposit. The most heated debates happen around when you should and shouldn’t deduct money from the deposit when a tenant is moving out. Most of these issues could be solved with a solid understanding of your state’s rental laws, a strongly written lease and good communication between yourself and your tenants.

What To Charge:

Rules and maximums will vary by state but one month’s rent is a fair security deposit as long as it can realistically cover most typical damages. Some property managers, desperate to keep unite filled, will offer lower security deposits as “move in specials.” While this might seem like a good idea at the time, you must think of the consequences down the line. First of all, advertising reduced move-in rates can attract renters with limited cash flow who might not be able to make future payments. Also keep in mind that damage done that exceeds your security deposit might end up coming out of your profits. Higher security deposits will also motive tenants to take better care of the property.

Where To Keep It:

Open an escrow account to hold security deposit money. Do not make the mistake of lumping in the deposits with normal rent or you could come up short when a tenant moves out. The funds are actually the tenant’s money, you are simply holding on to it in the event there is damage to the property. When they move out they are entitled to receive most of if not all of this money back. If you sell the property while it is rented you will be expected to transfer the security deposits to the new property owner.

Spell Out The Rules In The Lease:

Make sure your lease contains a section devoted to how the security deposit will be handled, define normal wear and tear, and provide in writing how the move out process will be documented. Use any state forms, disclaimers or templates that are available and have an attorney look over your final lease.

Documenting The Move-In and Move-Out Conditions:

You can document the condition of the unit in writing, with photos or even better yet, with video! Do a move-in inspection with the tenant present so that you are in agreement to the state of the unit before they move in. If there are questions later you can refer back to your documentation. When it comes time for the tenant to move out, again conduct a well-documented inspection with the tenant present. It is best to put the result in a written document for them to sign off on. Remember, you cannot charge for normal wear and tear or nominal cleaning. Many states also prohibit keeping the security deposit as punishment when a tenant breaks their lease, check to see what other lines of resources you may have for broken leases or unpaid rent.