How to handle security deposits

In the world of property management, nothing is more important yet controversial as security deposits. Owners try to “make money” off tenants by keeping their security deposit. Tenants sue owners often to get their security deposit back. Here are a few ‘basics’ to help keep both parties out of hot water.

Setting the amount: A lot of owners will set a very low security deposit. Their theory is that by setting the deposit low they can attract a lot of prospective tenants and rent their unit quickly. And they are absolutely correct.

The problem is they attract the wrong kind of tenant. They find people who are not able to save money — who live day-to-day. This becomes a problem when the tenant has a large expense (such as an auto repair or medical bill). Often the rent plays second fiddle to the other expense and rent is either late or not paid.  Once this cycle starts, it rarely ends without an eviction.

Hardly ever do owners set the security deposit too high.  But at Full Service Property Management, we set a security deposit equal to about one month’s rent.  We have found this is not too high of a deposit for most good tenants, but is high enough to attract those tenants who are resourceful and plan ahead.  Have you seen those apartment specials advertising “Move in for just $50”?  You can be sure that in most instances the ‘move out’ will cost the landlord a LOT more than that!!

Managing the deposit:  There are lots of rules to keep landlords from spending the tenants’ money.  (And until the tenant moves out, it should be considered the tenants‘ money, and not the landlord’s!!)  In WA state, owners must have the security deposit in a separate account (so they don’t co-mingle the tenants’ money with their own and end up spending it).  For one rental this may not be that big of a deal.  But as the number of rentals increases, so does the importance of this accounting practice.

Owners cannot hold a security deposit (in WA) without a detailed move-in checklist showing the condition of the property.  Many landlords think they are holding a security deposit, but without a move-in checklist all they have is prepayment towards rent — hardly any security at all!

Returning the deposit – the move out: Many owners abuse the security deposit by keeping it without justification, and give the rest of us landlords bad names.  It is important to be fair.  That works both ways.  A tenant also needs to understand sometimes that what they consider ‘clean’ isn’t necessarily commonly agreed upon.  For example, just because it is convenient to leave behind a large piece of furniture doesn’t necessarily mean anyone wants it!

In WA state, just like with the move-in, a move-out checklist is also required.  This is when the rubber meets the road.  Comparing the two checklists will determine and discrepancies.  But owners cannot simply get new carpet at the tenants’ expense.  It is not that simple.  The cost of that carpet needs to be depreciated over the life of carpet.  If the carpet is 5 years old and it has a 10-year lifetime, then the landlord can only deduct half the cost of installation of new carpet.  Different tasks have different lifetimes, and there is no standardized table of material lifetimes.  It is all a gray area that should not be abused by either party!

Also in WA state, a landlord has to give an accounting of what he/she is holding back on their security deposit.  This accounting has to be mailed or given to the tenant within 14 days.  At Full Service Property Management we call it ‘the 12-day letter’ to make sure we do not run afoul of the law.  This is a sticky area that needs to be adhered to religiously.  A landlord may not know all of the costs in 2 weeks.  So we will put estimates and placeholder amounts in our calculations.  We almost always do a $250 utility holdback.  We cannot tell you the number of times we have refunded a tenant’s security deposit only to have an unpaid utility bill come in afterwards!

In summary: Be smart and be fair.  If you are a tenant then leave the place as you found it or be prepared to take responsibility for damage.  If you are a landlrod, don’t play with other people’s money.  In both cases, handle the other party with respect.  Treat them as you would want to be treated.  Best of luck.

 

Disclaimer:  We are not lawyers, and this information is not offered as legal advice.  Laws change and different states may have different rules in place.  You are advised to seek the counsel of a licensed legal representative regarding any of the matters discussed here.

Peter Nelson is President of Full Service Property Management in Seattle, WA.  He and his wife have their own rental portfolio and have been successfully managing their portfolio and those of their clients for over 30 years.  More information is available on their website at www.fullservicepm.com.

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