In this video you will learn the top 6 common mistakes landlords make when handling a tenant’s security deposit. You can find yourself in a lot of trouble if the deposit isn’t properly used so make sure you catch each one of these tips.
- Collect the right amount for a deposit. A security deposit is all about risk management. Typically an amount equal to one month’s rent is sufficient. Sometimes a particular applicant will be a higher risk than the average person, because of credit or income for example. A double deposit might be necessary to bring the risk down to an acceptable level. If the risk is still to high with a double deposit then deny their application and move on to the next one. See our video on tenant screening in the comments section below to learn more about screening applicants.
- The deposit must be completely paid when signing the lease. Never let someone pay the deposit over time. By doing so their risk level just went up and your risk coverage just went down. When someone asks if they can pay it over time or sometime later after signing the lease, this should tell you they can’t afford to live there. Simply tell them that is the conclusion you have come to based on their request and move on to another application.
- Do not let the tenant use the deposit to pay rent or other charges. Eventually this may happen AFTER they move out but the deposit is not to be used while the tenant is living in the property. By doing so your risk level would go up because you don’t have the risk protection you had before. Even on their last month they still need to pay rent. If they don’t they should be charged a late fee as usual. The deposit is not to be used on their terms. You don’t want to give up the deposit until after they have moved out and you’ve determined the condition of the property and the status of their account.
- After the tenant moves out wait as long as possible before processing the deposit. You have to process it and return the balance eventually but wait the maximum amount of time you are allowed. Each state may have different laws, but in Utah, the tenant must receive an accounting for the deposit and, if applicable, the return of money within 30 days. The reason for waiting as long as possible is that sometimes issues are discovered after the initial move out inspection. For example, a clogged bathtub or unpaid utilities. If you rushed to return their deposit early you may be stuck paying these bills yourself.
- Do the math. Often landlords think they can just keep a deposit because of some issue or damage. That may be true and it may not be true. Do the math to find out. You need to determine the actual financial damages. Either there is a balance owed or a balance to return. To determine actual financial damages you will need to calculate losses based on actual invoices, repair bids, and determining the depreciated value of damaged items. Be fair. Don’t over charge. Make sure you can back up each item you are charging them for. Let the math determine if there is money to return or if you need to send them a bill.
- Provide the tenant with a statement. They should be able to see exactly how much was taken out of their deposit and what it was for. Itemize as much as reasonably possible. For example, if you were charged $500 for a handyman to fix a list of repairs simply list those repairs on the statement and put $500 next to the list. You don’t need each repair itemized if you weren’t billed that way.
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