How do security deposits work?

According to a study conducted by home repair aggregator Porch, more than 36 percent of landlords have retained some or all of a security deposit to make up for damage or destruction caused by renters. However, nearly 24 percent of renters felt that a landlord had unfairly retained part of their security deposit in that same study. In contrast, many landlords said that they had kept a security deposit when they shouldn't have.

For most tenants, coming up with a security deposit is one of the biggest expenses associated with signing a new lease. In addition, different states have different laws governing how much a landlord can charge for a security deposit. Some states, indeed, have no cap at all, and a landlord can charge whatever the market will bear.

Understanding security deposits is essential for the landlords who charge and maintain them and for the tenants who pay them. In this blog, you'll learn the ins and outs of security deposits to ensure you're always on the right side of local laws and regulations.

Landlords and security deposits

How do you determine how much you can and should charge in security deposits as a landlord? You'll want to keep in mind the following factors:

• State and local laws that pertain to your property
• The amount of the monthly rent payment for the unit you are renting
• The customary security deposit for your local market
• The quality and size of the rental and its fixtures and finishes
• The rental application and tenant screening information you have gathered, including rental history, credit score, and employment history
  

Thus, if you rent a high-end, luxury home in a gated community, you might charge more for a security deposit than a small studio apartment with only basic features. A renter with a history of non-payment of rent or who may struggle to meet the income requirements may present more of a risk and require a larger security deposit to offer the landlord added peace of mind.

Be sure to differentiate between a security deposit and "first and last month's rent." Suppose your tenant refuses to pay rent during their last month, expecting the security deposit to apply to the rent. In that case, you'll be left with no additional funds to cover any damages identified upon their move-out.

Escrow accounts

In many areas, security deposits must be held in a dedicated escrow account to ensure that the landlord cannot use them during the lease term, leaving them unavailable for return to eligible tenants. Even in states that do not require escrow accounts, many municipalities do, so be sure to check the laws in the areas where you hold and manage properties.

Determining whether or not to return a security deposit

It is important to act in good faith when determining how much of the security deposit should be returned to the tenant at the end of their lease. Your best strategy is to create a lease agreement that clearly outlines the following:

• The amount of the security deposit
• The bank where it will be held in escrow
• The number of days within which it will be returned after the lease expires
• The specific steps a tenant must take to receive their security deposit. These may include professional cleaning, carpet cleaning, replacing all light bulbs, satisfactory walkthrough with the landlord or property manager, and returning all keys, gate fobs, and garage door openers.
  

Keep careful records of the cost of any repairs or replacements required and send an itemized receipt along with the balance, if any, of the tenant's security deposit. This will help to offset subsequent questions or complaints. Finally, be sure to obtain a new address so that you can return the balance of the security deposit promptly to your tenant.

Tenants and security deposits 

As a tenant, you too will benefit from keeping track of information when you sign the lease, upon moving into the property, and upon moving out of the property. Pay attention to each of the following:

Upon signing the lease

When you first sign your lease, be sure to review it to find out exactly how much you'll be required to pay as a security deposit, how it will be held, what it covers, and when it will be returned to you. Look for specific information about required cleaning processes and procedures upon move-out so that you can be sure you are not charged for maintenance.

On your move-in day

If your landlord has not conducted a walkthrough with you before your move-in, closely inspect the home for damage. Your inspection should include burned-out lightbulbs, chipped or scratched paint and drywall, carpet stains or damage, cracked windows, damaged window coverings, or appliances that appear to be non-operable. Let your landlord know within 24 hours of your move-in and provide photos to verify the damage. Request repairs or replacement as needed.

When you're moving out

Again, you'll want to do a walkthrough, consulting your lease agreement and the photos you took when you moved into the space. In some states, you are only required to leave the property "broom clean," while in other states you may be required to have a professional cleaning crew clean the space and carpet. Ensure that you have done all required according to your lease and that you have not left any damages or repairs unreported or undone.

Double-check after your movers have removed your furniture and possessions to ensure that they didn't scratch or damage the walls, flooring, or doorways on their way out. If they have, and if you have time, try to have the damage repaired or take a photo to ensure that you are not charged for more than the actual damage.

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