What is a Security Deposit?
A security deposit is an amount of money—ranging from hundreds to thousands of dollars—that a tenant pays a landlord or property manager at the beginning of a lease, above and beyond the first or last month’s rent. The security deposit check is typically kept by the landlord or property manager in a separate, interest-bearing bank account; and it’s returned to the tenant when he or she moves out at the end of their lease. However, if a tenant damages the property, the landlord or property manager will use some or all of money in the security deposit account to pay for repairs.
The security deposit has long been a bone of contention between tenants, landlords, and property management companies. Some courts are awarding double damages to tenants suing their landlords for not returning their security deposits.
This post will provide guidance for property managers, landlords, tenants, and others navigating the issue of security deposits. It will discuss the laws in each state, provide advice from landlords and property managers, and address commonly asked questions about security deposits.
Security Deposit Tips for Tenants
If you’re looking to rent, following this simple advice will help you to avoid getting scammed.
Don’t be afraid to negotiate.
Remember that security deposits can be negotiable. There are no minimum amounts that property managers or landlords have to charge for security deposits.
Know how much of a security deposit you’ll need to pay.
There are some state laws that set the maximum amount you can be charged. Some states (such as Massachusetts) place the limit at one month’s rent, while others (like Nevada) place the limit at three months’ rent. Other states, however—including Florida, Ohio, and Texas—don’t stipulate how much a property manager or a landlord can charge for a security deposit. See our property management law section for specific states’ security deposit guidelines.
Read your lease before you sign it.
State laws vary on what landlords can deduct from your security deposit for property damage and unpaid rent. Make sure that you know what you’re committing to before you sign on the bottom line.
Think twice before paying less than a month’s rent as a security deposit.
Sure, it sounds easier at first—but getting a full month’s rent back (minus damages) when you move out can really help with moving expenses, as well as paying the security deposit on your next rental.
Understand any additional fees that you might be charged when you leave.
Pin down your landlord’s expectations now for when you move out. Will you be charged a cleaning fee, for example? It’s better to know now than to be surprised when you don’t receive your full security deposit at the end of your lease. State laws vary on these types of fees, so be sure to know your rights, too.
Take a look around your new rental and point out any existing damage.
If anything’s broken, ask your landlord to fix it. If you wait to say something, the repair cost might come out of your security deposit. A good idea is to take photos of the property to document any pre-existing flaws.
Know that your landlord can’t keep your security deposit if you break your lease.
This is your money, held in a trust account, unless you forfeit some or all of it through damage to your rental unit. They can, however, keep your last month’s rent and sue for any other unpaid rent.
Confirm when you’ll get your security deposit back.
Again, the laws vary; New York law only states that the security deposit should be returned within a “reasonable time,” but the time period typically ranges from 14 days (Vermont) to 60 days (Arkansas). For information on the specific laws in your state, see Nolo’s Deadline for Returning Security Deposits, State-by-State.
Take action if your landlord refuses to return your security deposit.
According to a Rent.com survey, 26% of renters don’t get their security deposit back when they move, and 36% of those renters received no explanation from their landlord. After waiting the state-mandated amount of time without seeing all or part of your security deposit, consider writing your landlord or property manager a demand letter for the return of the security deposit. Download the form, fill it out, and keep a copy. This will ensure that you have a paper trail in case you decide to take them to court.
Security Deposit Tips for Landlords & Property Managers
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Know the laws in your state.
Learn where you should keep deposits, how much you can collect, how quickly it needs to be deposited into a specific security deposit account, how interest should be paid, any reports that are required, etc. It’s important to understand that security deposits for residential properties are controlled by statute calling for nondiscriminatory and equal treatment. It is a prohibited, discriminatory practice to charge a family a different amount then an applicant without children. It is also prohibited by law to require an excessive amount for the security deposit. Check the laws pertaining to security deposits in your state for specific guidelines.
Don’t be tempted to charge less than you’re entitled to.
While it may seem advantageous to lower the security deposit amount to attract more tenants, you run the risk of creating headaches down the road. As Salvatore J. Friscia of San Diego Premier Property Management explains in his blog post on how much to charge for a security deposit, there are 3 good reasons for this: 1. It weeds out financially unstable tenants; 2. It’s a hedge against rent default; and 3. It prevents tenants moving out unannounced.
Security deposit checks are not extra rent.
…so don’t treat them as such. These deposits need to be stored separately from rent checks and returned to your departing tenant, even if they’re behind on rent, assuming that there’s no damage to the unit.
Get it on video.
This tip comes from Mary Yetter-Hurd of Rent Smart Missoula: “The move-out inspection and [resulting] deductions to the security deposit is the most contested and potentially hostile situation in the landlord-tenant relationship. It is for that reason that we conduct a move-in video prior to turning over possession at the beginning of the tenancy. It fully documents the condition of the property at the time of move-in. We also provide the tenants a copy to the links so they have the documentation as well. If you can incorporate video documentation into your move-in process, it will go a long way in resolving a security deposit dispute long before it starts.”
Establish trust or escrow accounts for security deposits.
Make sure that your bank knows the deposit account is for “trust” or “escrow” funds. This will prevent the forfeiture of these funds in the unlikely event that you or your company encounter legal issues.
Keep security deposits in a separate trust or escrow account that’s under your control.
Even if state regulations allow you to mix security deposit funds with rent or turn them over to the rental owner, you should always keep them in a separate trust or escrow account. Never mix accounts—it’s far too easy to accidentally spend the security deposit funds.
Property management is a different beast than real estate sales.
Security deposits are not the same as pre-sales earnest money or down payments—different rules apply.
Just because you can legally handle escrow monies doesn’t mean that you should.
Even if you have a broker’s license, you should get trained before handling security deposits, or consider hiring someone with more experience. A person who can perform a self-audit is worth their weight in gold.
Make sure that your property owners are in the loop.
Take steps to ensure that your property owners are aware of your policies and procedures on handling security deposits. One California property management company, Portola Property Management, made a video to communicate that information to their current and future owners. A reliable property management software like Buildium can streamline this process significantly.
Let tenants know why they’re not receiving their deposit back in full.
If you do need to deduct from a tenant’s security deposit because of damage they’ve caused to a unit, send them an itemized list of the issues you found and the cost to repair each of them. If you walk through the unit with them, pointing out each issue, then follow up with an itemized list, you’re unlikely to have problems—especially if they’re given the chance to correct issues before they move out.
Frequently Asked Questions About Security Deposits
Security deposits are a valuable tool for preventing damage and protecting owners’ investments, but they do come with a level of responsibility. Handling them correctly will keep things running smoothly and ensure that property managers stay on the right side of the law.
Do property managers need to give tenants a written statement of condition?
Whether your state requires it or not, it’s a good idea for property managers to give their tenants a written statement about the condition of the property when they move in. (Be sure that both you and your tenant sign the statement.) This way, there will be no question about whether or not that hole in the wall was there before the tenant moved in.
Can you deduct damages from the security deposit? What about unpaid rent?
When a tenant moves out, do a final walk-through of the property together, noting any damage. It’s a good idea to bring along a digital camera so that you can justify any deductions in case there’s a dispute. You can do this before the lease ends to give them a chance to fix any issues themselves. Property managers have the right to deduct from the security deposit for any new damage that they find. You can’t deduct for “normal wear and tear,” so be sure to develop an understanding of what this includes. Depending on where you live, property managers may be able to deduct for unpaid rent as well; again, check the laws in your state to be sure.
How quickly do property managers need to refund a security deposit once a tenant moves out?
Whether or not a property manager deducts for damage, many states have rules about the allotted timeframe for refunding security deposits. For example, in Massachusetts, property managers must refund security deposits or provide tenants with a detailed list of damages and the cost of repairs within 30 days. If a landlord fails to do this, he loses his right to deduct anything from the security deposit—no matter how much damage the tenant caused.
If you enjoyed this article, you might enjoy reading our post on utilizing surety bonds as an alternative to security deposits. Additionally, we recommend checking out Buildium Property Management Laws, our database that covers security deposit laws by state.
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