Insurance

What You Need To Know About Withholding Security Deposit

Think of a security deposit as some kind of a safety net for a landlord. The security deposit is a sum of money paid by the tenant to be kept by the renter or lessee, where payments like property damage or unpaid rent can be deducted from. If the tenant has faithfully complied with paying the rent and left no billable damage to the property, then the security deposit must be returned in full.

As a landlord, you know that most times, security deposits are a necessity in order to ensure proper care and compliance when the property is concerned. As much as you may want to ease the financial burden on your tenants and lessees, withholding the security deposit is a must in some cases. You would need that money to pay for property damage expenses, after all. What are the situations where you can withhold the security deposit then? Are there other concerns that you need to be aware of regarding the security deposit?

Things to Always Remember about Security Deposits

You should always take extra care and precaution whenever your tenants’ finances are concerned. Ground rules regarding security deposits are necessary for the fairness between, and the benefit of all parties. In order to help you become a better landlord, here are 4 things to remember about security deposits.

What can you deduct from a security deposit? Are there any important variations across states?

Depending on which U.S. state your property is located, there may be certain laws that you need to follow when you collect the safety deposit. This is important as some of these laws will dictate how much you can collect, or whether you will need to open an account where you can store the safety deposit.

Often, when a state law requires the landlord to store the safety deposit in a bank account, the landlord will also be required to issue an annual statement to the tenants showing that the deposit is intact and continuously earning interest. Make sure that you are aware of the laws of your state. Here are situations that call for a deduction from the deposit.

  • Breaking the lease – There are acceptable and legal reasons for a tenant to prematurely break lease. These reasons include failure of the landowner to properly maintain the property, the property being rented is not legally owned, or the tenant is actively working in the military.

There are specific variations again, depending on what state the property is in. However, should the tenant not have a legally valid reason to break the lease, then the landlord may be able to claim the security deposit.

  • Abandonment and unpaid rent – Sometimes, the tenants would opt to just not pay the last few months of rent and not claim the security deposits. This is totally acceptable, as long as all parties concerned agree.

  • Normal wear and tear – Landlords cannot charge tenants for what can be classified as the normal wear and tear of property. The HUD listed cases that fall under the “normal wear and tear”.

  • Property damage – A damaged or destroyed property is one of the very reasons to withhold a security deposit. Remember that the charges for property damage can exceed that of the security deposit. This means that if the tenant’s security deposit is $2,000 but the damage repairs cost $2,500, then the landlord is fully within his rights to charge the excess $500 from the tenant.

  • Maintenance work – Normal cleaning and maintenance jobs must be handled by the landlord. Certain exceptions include excessive production of garbage by the tenant, or an expensive end of tenancy disposal job.

For example, if the tenant has left behind a number of items in the property after moving out, then the landlord can withhold part of the security deposit to pay for the cost of cleaning up these items.

  • Painting – A normal paint job that comes as a result of wear and tear or normal weathering must be shouldered by the landlord. However, if a paint job is needed as a result of what can be considered damage to property, then part of the security deposit may possibly be withheld. An example for this case would be discoloration of walls due to indoor smoking.

  • Other things to consider – There is quite a fine line between what can and cannot be charged to the security deposit. For example, damage to your properties drapes cannot be charged to your tenants if the damage is just normal discoloration due to aging. Holes in the drapes due to negligence, however, are chargeable. Make sure you assess all items properly.

Best practices to document reasons for withholding

One of the most important documents to keep track of is the pre-tenancy inventory and check-in report. This document should include all items of note within the property, as well as their status upon the move-in date of the tenant. It should include the age of the objects, their state, brand, and other qualities that you believe should be noteworthy.

Keeping track of this check-in report will make sure that you and your tenants are in agreement of the status of the items before they move in. This document will serve as a baseline for comparison when they move out. What may also help would be to take properly documented photos of the items pre-tenancy.

A copy of the agreement for tenancy should also be kept at hand at all times. One legal reason for withholding a security deposit is if the tenant prematurely breaks the lease agreement. For instance, there is a breach of the agreement for tenancy, or if there is proof of negligence in the landlord. Having a copy of the tenancy agreement will make sure that you have a document to show if a dispute arises.

Other documents and items that should always be properly kept and accounted for are the following:

  • All receipts for repairs, purchases related to the property – Keep everything, whether they are billable to the tenants or not.

  • All proofs of payment by your tenants – You’re not just protecting your interests. You also need to keep a good relationship with your tenants. Keep all proofs of payment for your tenants’ benefit, just in case a matter arises where they will be required.

  • Statements and receipts for utilities – Again, it wouldn’t hurt to keep a few more sheets of paper if it means protecting the interests of all parties involved.

  • All written, printable, or electronic communications between landlord and tenant – Agreements are quite powerful legally. Make sure all file-able agreements and communications between you and your tenants are properly documented.

If you foresee any use for a document, agreement, or even just a piece of paper containing information having any use in the future, then just keep them to be safe. You never know what will or will not be useful in case of a security deposit dispute. Having the proper supporting documents available is the most effective way to strengthen your case in these situations.

How you should notify the tenant for withholding

No matter how unreasonable your tenants are, you must never give them a reason to file a complaint against you based on your behavior. Make sure that you are always firm yet reasonable. It would also help if all communications between landlord and tenant are properly documented. This means that aside from giving a verbal or oral notice to your tenant, you must also give a printed copy that can be documented.

Tips to prevent security deposit disputes

The best way to prevent a dispute between landlord and tenant regarding the withholding of security deposits would be proper documentation. A properly accomplished pre-tenancy inventory sheet and photos will be your best friend should a dispute arise. Full transparency regarding expenses related to the property should also be prioritized. An open line of communication between the landlord and the tenant should also be considered.

Again, all items mentioned earlier should be taken into account in order to prevent any complaints being filed against you. A properly and timely filed case, especially one with full transparency and documentation, is one that will result in a fair judgment. Make sure that all communications are done on proper channels and always kept in a civil tone. You wouldn’t want any rumors of you being an unreasonable landlord floating around, would you?

Security Deposits are Just the Tip of the Iceberg. Learn More About Being a Good Landlord.

Learn about all your rights and responsibilities as a landlord. While different states may have various laws or rules, and the first step to becoming a proper landlord is knowing all of these, and knowing what situations they apply to.

For all your real estate education needs, Rental Academy is here to help and share what we know. We have the best and most experienced real estate professionals that can give you the know-how you need to become a well-informed landlord.

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