Top 10 Security Deposit Mistakes

Collecting a security deposit is one of the most effective tools you have at your disposal to keep your rentals profitable — unless you make a mistake.

Then, a security deposit can backfire, leaving you to pay penalties and fees to a tenant who disputes security deposit deductions.

Here are some things to avoid if you want to keep your rental business running in the black:

1. Charging more than allowed. A majority of states regulate how much a landlord can collect for a security deposit.  Make sure you stay under the limit.  Otherwise, this can invalidate the entire lease — which earns this mistake top billing on the list!

2. Not charging the full amount allowed by law. Bargaining with the deposit as an incentive for tenants is risky.  It’s better to offer something else, like a few free days at move in.

3. Not providing the tenant with a receipt stating the amount that has been designated for the security deposit, versus first month’s rent, fees, etc.

4. Not stating the amount designated for the deposit in the lease. Leaving that figure blank will make it hard to enforce in court.

5. Designating a separate pet deposit as part of the total.  Only charge a pet deposit if you can collect it in addition to the regular deposit. Otherwise, you are limited to using those funds only for pet damage.

6. Not following state law regarding how the funds are held.  For instance, some states require placing funds in an interest-bearing account. Others require posting a bond, or disclosing the location of the account. Know your local rules.

7. Not recording the condition of the property during a walk-through when the tenant moves in.  Allow the tenant an additional week after they move in to amend that condition report in the event they find other items of damage that they want to claim were there when they moved in. That way, you are in a good position in the event of a legal dispute because you can show the tenant had every opportunity to identify damage at that time.

8.  Not contacting the tenant pre-move out to discuss what will need to be fixed. Providing tenants a head start will reduce the likelihood of taking a deduction from the deposit, which eliminates the risk of a dispute.  A landlord never benefits when they have to clean up — even if there is a security deposit to cover the costs.

9. Not doing a final walk-thru with the tenant, or having the tenant sign a move-out statement detailing any damage.  You must present both a “before” and an “after” picture in the event of a dispute.

10.  Partial or early distributions of the deposit, like providing a refund to a roommate who moves early, or allowing the tenant to apply the deposit to the last month’s rent cause legal hassles, eliminate the ability to check for damage once the tenant’s possessions are cleared out, and defeat the purpose of collecting a deposit in the first place.

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