Security Deposit Tips for Property Managers, Landlords, and Tenants

By Matt Donnelly

A security deposit is an amount of money — ranging from hundreds to thousands of dollars — that a tenant pays a landlord or property manager at the beginning of a lease above and beyond first or last month’s rent. The security deposit is kept by the landlord or property manager in a separate interest-bearing bank account and is returned to the tenant when he or she moves out at the end of their lease. However, if a tenant damages the property, the landlord or property manager will use some or all of the security deposit to pay for repairs.

The security deposit has long been a bone of contention between tenants and landlords and property managers. Some courts are awarding double damages to tenants who sued their landlord for not returning their security deposit.

This post will provide guidance for property managers, landlords, tenants, and others who want to navigate the world of security deposits. It will discuss the laws in each state, provide advice from landlords and property managers, and address some of the most commonly asked questions about security deposits.

Security Deposit Tips for Tenants

If you’re looking to rent, following some simple advice will help you avoid getting scammed.

1. Don’t be afraid to negotiate. Remember that security deposits can be negotiable. There are no minimum amounts that property managers or landlords have to charge for security deposits.

2. Know how much of a security deposit you’ll need to pay. There are some state laws that set the maximum amount you can be charged. Some states (such as Massachusetts) place the limit at one month’s rent, while still others (like Nevada) place the limit at three month’s rent. Other states, however, including Florida, Ohio, and Texas, don’t place limits on how much a property manager or a landlord can charge for a security deposit. See Nolo’s Security Deposit Limits, State by State for specifics for your state.

3. Read your lease before you sign it. State laws vary on what landlords can deduct from your security deposit for things like property damage and unpaid rent. Make sure that you know what you’re committing yourself to before you sign on the bottom line.

4. Think twice before paying less than a month’s rent as a security deposit. Sure, it sounds good at first, but getting a full month’s rent back (minus any damage) when you move out can really help with moving expenses and even paying the security deposit on your next rental.

5. Understand what fees you might be charged for cleaning the unit when you leave.State law varies here. Also pin your landlord down on what terms like broom clean mean when they appear in your lease. Remove any unused furniture.

6. Take a look around your new rental and point out all the flaws. If anything’s broken, ask your landlord to fix it. If you wait to say something, the repair cost might come out of your security deposit. A good idea is to take photos of the property to document any preexisting damage.

7. Know that your landlord can’t keep your security deposit if you break your lease.This is your money, held in trust, unless you forfeit some or all of it through damage to your rental unit. They can, however, keep your last month’s rent and sue for any other unpaid rent.

8. Confirm when you’ll get your security deposit back. Again, the laws vary. New York law states only that the security deposit should be returned within a “reasonable time,” but the time period typically ranges from 14 days (Vermont) to 60 days (Arkansas). For information on the specific laws in your state, see Nolo’s Deadline for Returning Security Deposits, State-by-State.

9. Take action if your landlord refuses to return your security deposit. According to a Rent.com survey, 26% of renters don’t get their security deposit back when they move, and 36% of group get no explanation from their landlord. After waiting the state-mandated amount of time without seeing all or part of your security deposit, consider writing your landlord or property managers a demand letter for return of security deposit. Download the form, fill it out, and keep a copy. This will ensure that you have a paper trail in case you decide to take them to court.

Security Deposit Tips for Landlords and Property Managers

Property managers, too, can follow a few steps to avoid problems when it comes to security deposits.The bottom line is that security deposits don’t have to be scary and problematic.

1. Know the laws in your state. Learn where you keep deposits, how much you can collect, how quickly it needs to be deposited into the bank, whether and how interest should be paid, required reports, etc. It’s important to understand that security deposits for residential properties are controlled by statute and call for nondiscriminatory and equal treatment. It is a prohibited discriminatory practice to charge a family a different amount then an applicant without children. It is also prohibited by law to require an excessive amount for the security deposit. Check the laws pertaining to security deposits in your state for similar guidelines in your area.

2. Don’t be tempted to charge less than you’re entitled to charge for a security deposit. While it may seem easier to lower the amount to attract more tenants, you run the risk of creating headaches down the road. As Salvatore J. Friscia of San Diego Premier Property Management puts it in his blog post on how much to charge for a security deposit, there are three good reasons for this: 1. It weeds out financially unstable tenants, 2. it’s a hedge against rent default, and 3. it protects against tenants moving out unannounced.

3. Security deposits are not extra rent.  Don’t treat them as such. These deposits need to be returned to your departing tenant, assuming there’s no damage to the unit.

4. Get it on video. This tip is from Mary Yetter-Hurd of Rent Smart Missoula in Missoula, Montana: “The move out inspection and deductions to the security deposit is the most contested and potentially hostile situation in the landlord-tenant relationship. It is for that reason we conduct a move in video prior to turning over possession at the beginning of the tenancy. It fully documents the condition of the property at the time of move in. We also provide the tenants a copy to the links so they have the documentation as well. If you can incorporate video documentation into your move in process, it will go a long way in resolving a security deposit dispute long before it starts.”

5. Establish trust accounts for security deposits. Make sure your bank knows the deposit account is for “trust” or “escrow” funds. This will prevent forfeiture of those funds in the unlikely event that you or your company encounter legal issues.

6. Keep security deposits in a separate trust account that is under your control, even if state regulations allow you to mix it with rents or turn it over to the rental owner. Never mix accounts because it’s far too easy to accidentally spend the security deposit funds.

7. Property management is a different beast than real estate sales. Security deposits are not the same as pre-sales earnest money and down payments. Different rules apply.

8. Just because you’ve had a broker’s license for years and can legally handle escrow monies like security deposits, doesn’t mean that you should.  Get trained first or hire someone who is. A person who can perform a self-audit is worth their weight in gold.

9. Make sure your property owners are in the loop. Take steps to ensure your property owners are aware of your policies and procedures on handling security deposits. One property management company, Portola Property Management in Santa Cruz, California, made a video to communicate that information to their current and future owners.

Frequently Asked Questions on Security Deposits

Security deposits are a valuable tool that can help protect property managers against damage caused by tenants, but they do come with a certain level of responsibility. Handling them correctly will keep things running smoothly and ensure that property managers stay on the right side of the law.

Do property managers need to give tenants a written statement of condition?

Whether your state requires it or not, it’s a good idea for property managers to give their tenants a written statement about the condition of the property. (Also be sure that both you and your tenant sign the statement.) Better still, do a walk-through before a tenant moves in, noting any pre-existing damage along the way. That way there will be no question about whether or not that hole in the wall was there before the tenant moved in.

What about deductions for damage and unpaid rent?

When a tenant moves out, property managers have the right to deduct money from the security deposit for any damage they caused. Do a final walk-through of the property together, noting any new damage. Property managers can’t deduct for “normal wear and tear,” so be sure to exclude those issues. It’s a good idea for property managers to bring along a digital camera so they can justify any deductions in case there’s a dispute. Depending on where you live, property managers may be able to deduct for unpaid rent as well. Again, check the laws in your state to be sure.

How quickly do property managers need to refund a security deposit when a tenant moves out?

Whether property managers deduct for damage or not, many states have rules about the allotted timeframe for refunding a security deposit once a tenant moves out. For example, in Massachusetts property managers must refund security deposits or provide tenants with a detailed list of damages and the cost of repairs within 30 days. If a landlord fails to do this, he loses his right to deduct anything … no matter how much damage the tenant caused.

More Resources on Security Deposits

Nolo’s resource page on security deposits – Learn how tenants can get their security deposit back and how property managers should handle security deposits. Includes a legal section.

Security Deposits FAQ: Renters’ Rights You Need to Know – This is a solid resource page from Realtor.com covering various aspects of security deposits.

Security Deposits: It’s Your Money! – This is a California-based website representing a “group of tenants, advocates, and organizations that believe it’s time to bring a greater sense of fairness to the business of tenant security deposits.”