Security deposits are known for causing the most contention between property managers and tenants. They cause contention for numerous reasons, but following these steps will help eliminate errors on your side.
- Know the Law: There are laws dictating where security deposit money should be kept, how much you can charge, how quickly funds need to be deposited in the bank and returned to tenant at the end of the lease, and what should be done with interest earned. Also remember that security deposits must to be discriminatory and must be the same for every tenant. Know the laws in your state; they vary.
- Don’t Charge Less than Allowed Just to Attract New Renters: It may seem like a good business move to lower your security deposit to fill vacancies faster. But, be warned, lowering your security deposit will invite financially unreliable tenants to apply. Tenants who can’t afford a high security deposit are more likely to get behind and miss a rent payment. Also you may need that full deposit to cover damage costs after a tenant leaves. If you lower your security deposit, you may be stuck paying for damages out of pocket.
- Keep Security Deposits Separate: Create a separate bank account exclusively for security deposit funds. Make sure the bank knows the account is for escrow or trust funds, if you company were to experience legal issues, these funds would be protected. It is important to remember that security deposit money is not your money; it should not be treated as rent money. You are just holding onto the money for your tenants and can only touch it if they forfeit it.
- Document Your Properties’ Condition: Perhaps the most contention part of a tenant/property manager relationship concerns whether or not a tenant’s security deposit needs to be used to cover damages. Every tenant wants their security deposit back in full, so unless you have irrefutable proof of damages you may have a long battle ahead of you. The best way to avoid disagreement is to fully document (a video is the best proof) the status of the rental before a tenant moves in, and once again right before the tenant hands over the keys. Full documentation will also help you receive compensation from your insurance company if the damages exceed the security deposit.
Of course there will always be disputes, but taking these precautions will lesson those and help you and your tenants to see eye to eye and keep you in line with the law.