Tenants that try to use damage deposit as last months rent

General Landlording & Rental Properties
10yFollow

Tenants that try to use damage deposit as last months rent

Andrew DeB
Investor · Grand Prarie, Alberta · Member since 2015 · 12 posts · 3 votes

So i've come across this situation for the 3rd time in 3 years of landlording. A tenant has financial issues and starts paying rent a week or two late every month. Then they tell me they are moving because they can't afford my property anymore and choose not to renew the lease when it comes up. They tell me they will pay rent a week or two late like the last couple months. After i bug them again for rent they tell me they need the money for the damage deposit on the new place and tell me to just keep my damage deposit as rent. Now i'm in a situation where i have no choice but to accept because where i live before i can evict someone i have to give a 2 week notice for non payment of rent. Plus i don't get any late fees.

Now if there is any damages or cleaning that they haven't done then i have to chase them down for money. As well my properties have basement suites so the utilities are in my name and they pay me a % of utilities. So for the final month there is always $100-$200 because i get the utility bill 2 weeks after they moved out. Normally i hold a portion of the damage deposit until i get the bill and refund them the remaining amount. Now i have to deal with the hassle of chasing them for at least a couple hundred plus anything for damages. If they choose not to pay it's not a high enough amount for me to bother going to court over so i just bite the bullet. How can i avoid this happening a 4th time?

1Reply
42 views

Most Popular Reply

Michael Gansberg
Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes
10y

Welcome to being a landlord, @Andrew DeB. It sounds like your tenants fall into what I'd term the "financially stressed" category, a category which an unfortunately high percentage of Americans fall into. Even after 13 years as an owner, I run into this problem pretty often. There is exactly one solution, and I'm going to detail it below- just for you.

Buy Class A residential and only rent to residents with the highest credit and income.

There- now you know. Of course, if you do that, your yield will drop precipitously- in fact, if you tried it in my hometown(New York City,) you'd have a negative cash flow, as the rent rate wouldn't cover the mortgage expenses and taxes.

What you've chosen to do, and please correct me if I'm wrong, is purchase B and C residential, and rent to those who are frequently unable to buy a home of their own. They rent from you, and pay a higher rate for that real estate than they would if they were able to buy it on their own, and you're benefiting from that spread- and making a positive cash flow. When they get into a pinch, they'll sometimes stiff you for a few hundred bucks. So what are your options now?

You can sue them, as some people suggest.  Lemme tell you something about that- if I had a dollar for every thousand dollar judgment I had against someone, I'd be a rich man. In fact, those big judgments would be more valuable as toilet paper. They don't have the money to pay you in the first place, so why bother suing them unless you think they're lying about it and sitting on some big stash of cash? Spoiler alert- they're not. I've given judgments to collections agencies- I estimate about a two percent recovery rate. I've stopped doing that altogether, it's such a waste of time and resources.

If you value your time and money, you won't use either in court, 'cause you're not gonna get 'em back. It is justifiable to start an eviction proceeding occasionally-  specifically when you think a tenant is not going to move out, but is just trying to snag a free month off you. 

Bottom line? Enjoy your cash flow, and stay out of court for such piddling little things- focus on portfolio optimization. Things like property improvements, energy efficiency, tax reductions, various economies of scale, reducing insurance premiums...and if you've done all those things? Focus on sipping margaritas on the beach.

2Reply
See this reply in the discussion

16 Replies

Jump to latestLatest
  • Robert Melcher
    Residential Real Estate Broker · San Antonio, TX · Member since 2016 · 506 posts · 311 votes
    10y

    In Texas, a landlord can pursue treble the amount withheld if the tenant does not pay rent in the last month arguing the deposit can be used for rent.  This action is deliberate bad faith because it limits the escrowed amount agreed contractually and intended as security against damages.

    Good luck collecting it, because even if you win the judgement there's no way to enforce payment except through credit reporting and the possibility of settlement to clear the reported bad debt.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    You can do anything if you do not begin the eviction process as soon as they are late on their rent.

    It is the price of not operating on a strict no pay no stay policy.

    What does your state permit in regards to first, last and deposit. If only first and deposit you need to be much quicker in filing for eviction to protect yourself.

    For myself I always take tenants to court regardless of the amount as the ruling covers my costs in addition to getting the money owed. I have gone to court for as little as $100. 

    0Reply
  • Austin Youmans
    Investor · Vancouver, WA · Member since 2014 · 359 posts · 143 votes
    10y

    Be strict about due date and late fees. 

    Go to small claims and hand it to a collection agency as it is probably not worth your time.

    0Reply
  • Chris V.
    Rental Property Investor · SF Bay Area · Member since 2015 · 154 posts · 179 votes
    10y

    Thanks for bringing this up! I have the same problem now and then and I am SURE it's not just you and me. The last month is a very vulnerable period for a landlord. Because lets say the damage deposit is one months rent, which is typical. The tenant tells you they will move out on the fist of next month. And they just don't pay the last month. By the time you are pretty sure they are not going to pay you are two weeks in (because just like you said, they were by then already consistently paying late). Now what are you going to do; get an expensive eviction process started while they are going to leave in two weeks anyway? On top of that you risk pissing them off to the point of damaging your property. So yo are just left to hope they will not leave damage and cleanup that is disproportionate to the time they had been renting. Lets say there is a couple of hundred worth of damage or cleanup. Good luck finding someone what wants to go and try to collect a "small" amount like that. And how much time do you really want to spend chasing something you will never see again. And they people don't care because they were system gamers with nothing to loose to begin with.

    I have not found a good solution for this myself. In theory the best solution would be to never get someone like that in your property to begin with.:)) So easy to say. Care full screening, helps but I found it to be not fool proof particularly because a certain type of asset class attracts a certain type of tenant. So to some extend you have to pick between bad, not so good and worse:).

    I always try to get a double or even triple deposit if I can before they move in if there is any reason there might be an issue. (check your local laws). If they turn out to be great after a year or so I don't mind refunding some of that either.

    Depending on easy it is to find a new tenant quickly (and if they are on a month to month) you might consider asking them to leave right away if they start paying late. I have tried to work with people* who were "starting to get late" and unfortunately I have so far never seen that end with the tenant being back on track. 

    *The reasons I worked with them were rather selfish I must admit...:) For example if they live in a unit that I can NOT market without remodeling and I do not have the money or time to remodel, I find it is in my interest to try to get them to pay for another while, even if in the end I only see half of the rent.  As long as they are not creating issues for other tenants  this is still better than no rent for an empty unit me paying the utility bills on top of that. Once I am flush again and am ready to tackle the rehab I can always turn up the heat.

    I am really hoping that someone else here's going to come up with a great way to navigate this!:)

    0Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    10y

    I've had this happen a few times in our rental condos in FL. When a tenant has given notice, or we decide not to renew the lease, we give the proper notice and remind them that the security deposit can *not* be used as the last month's rent, per the lease. We also discuss this before the tenant even moves in, but often they choose not to remember it ;)

    On the 4th day without rent, we post a 3 Day Pay or Quit notice. We tell the tenant that if the rent and late fees are not paid, we will file the eviction on the earliest business day possible and let them know that that filing will be part of their public record. It's usually given them the incentive to pay the rent and late fee, or to move out in 3 business days.

    In one case, it did not, and we went through with the eviction. The tenant did not trash the place.

    We had one tenant argue that she was indeed allowed to use the security deposit as the last month's rent, despite my reading the lease section to her over the phone. Our tenants initial every page of the lease as we go over it before they move in, and we remind them of this clause more than once. 

    My advice going forward is to make sure they understand and initial the section of the lease that covers this, remind them when they give their notice, and immediately post a Pay or Quit as soon as possible. Then hope for the best ;)

    1Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    10y

    Moral to the story, don't let tenants get away with paying their rent late.

    1Reply
  • Aly W.
    Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
    10y

    That too :) If it becomes a habit, you are wasting time and losing money. There are exceptions, but only if you've been at this a while and know when you are, and aren't, being played.

    0Reply
  • Randy E.
    Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Andrew DeB:

     Now i'm in a situation where i have no choice but to accept because where i live before i can evict someone i have to give a 2 week notice for non payment of rent. Plus i don't get any late fees.

    You do have a choice.  You can file for eviction.  The downside is you may spend money to file for eviction, but never collect.  The good news is the unscrupulous tenant now has an eviction case on their record and they will have difficulty renting from any responsible landlord in the future until they satisfy their account with you.

    Then, going forward, you can tell future applicants that not only can the security deposit NOT be used for the final month's rent, but that you will and have filed claims against past tenants who attempted to do that.  Saying that with conviction should be enough to convince most otherwise responsible applicants/tenants to abide by that clause.

    0Reply
  • Steven Woon
    Investor/Real Estate Agent · Allen, TX · Member since 2012 · 33 posts · 10 votes
    10y

    I used to live in Ontario, Canada which is extremely tenant friendly. Rented a house and after two-plus years, my landlord sold the house. 

    Prior to selling, he gave us a 60 day notice to vacate AND at the same time, file for a hearing (not eviction) with the Landlord and Tenant Board (LTB). I believe this was a very prudent move. If he did not do so, there would be nothing preventing me from filing an appeal with the LTB on the 59th day to challenge the reason for him asking me to move. Since Ontario has rent control on most rental properties, getting me to vacate would be a very long-drawn and costly process. Fortunately for me, I was already thinking of moving back to Texas before that happened.

    I am not sure about the rules in Alberta, but knowing that the province is now led by a Socialist party, I would assume it would be as tenant-friendly as in Ontario. So, I strongly recommend that you follow the normal procedure to start evicting your tenant as soon as allowed if you do not received rent as agreed.  I would not take his word that he will be gone by end of the month. There is no certainty that he will move out after the "verbally" agreed date, esp. if he cannot secure his "other" property.  He will probably not bother to pay his rent for the extended stay.

    0Reply
  • Michael Gansberg
    Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes
    10y

    Welcome to being a landlord, @Andrew DeB. It sounds like your tenants fall into what I'd term the "financially stressed" category, a category which an unfortunately high percentage of Americans fall into. Even after 13 years as an owner, I run into this problem pretty often. There is exactly one solution, and I'm going to detail it below- just for you.

    Buy Class A residential and only rent to residents with the highest credit and income.

    There- now you know. Of course, if you do that, your yield will drop precipitously- in fact, if you tried it in my hometown(New York City,) you'd have a negative cash flow, as the rent rate wouldn't cover the mortgage expenses and taxes.

    What you've chosen to do, and please correct me if I'm wrong, is purchase B and C residential, and rent to those who are frequently unable to buy a home of their own. They rent from you, and pay a higher rate for that real estate than they would if they were able to buy it on their own, and you're benefiting from that spread- and making a positive cash flow. When they get into a pinch, they'll sometimes stiff you for a few hundred bucks. So what are your options now?

    You can sue them, as some people suggest.  Lemme tell you something about that- if I had a dollar for every thousand dollar judgment I had against someone, I'd be a rich man. In fact, those big judgments would be more valuable as toilet paper. They don't have the money to pay you in the first place, so why bother suing them unless you think they're lying about it and sitting on some big stash of cash? Spoiler alert- they're not. I've given judgments to collections agencies- I estimate about a two percent recovery rate. I've stopped doing that altogether, it's such a waste of time and resources.

    If you value your time and money, you won't use either in court, 'cause you're not gonna get 'em back. It is justifiable to start an eviction proceeding occasionally-  specifically when you think a tenant is not going to move out, but is just trying to snag a free month off you. 

    Bottom line? Enjoy your cash flow, and stay out of court for such piddling little things- focus on portfolio optimization. Things like property improvements, energy efficiency, tax reductions, various economies of scale, reducing insurance premiums...and if you've done all those things? Focus on sipping margaritas on the beach.

    2Reply
  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Steven Woon

    Not sure how long you have been in Texas, but your memory seems affected.  Despite the rhetoric, there are no socialist parties in Canada ... save perhaps the communist party if it still exists.

    The landlord tenancy law in Alberta is more balanced than in Ontario (which vies with Nova Scotia for the most Tenant Friendly status ... Ontario appears to be once again in the lead).  Next to NB, it is one of the most balanced places to be a landlord.

    2Reply
  • Paul MacInnis
    Investor · Windsor, Nova Scotia · Member since 2015 · 128 posts · 34 votes
    10y

    as @Roy N. said - Nova Scotia is very tenant friendly.  

    I have been stiffed several times, but as @Michael Gansberg said......just accept the loss and move on.  Consistently being a great landlord will land you good tenants (usually)!  I also don't chase in court anymore.

    0Reply
  • Steven Woon
    Investor/Real Estate Agent · Allen, TX · Member since 2012 · 33 posts · 10 votes
    10y
    Originally posted by @Roy N.:

    @Steven Woon

    Not sure how long you have been in Texas, but your memory seems affected.  Despite the rhetoric, there are no socialist parties in Canada ... save perhaps the communist party if it still exists.

    The landlord tenancy law in Alberta is more balanced than in Ontario (which vies with Nova Scotia for the most Tenant Friendly status ... Ontario appears to be once again in the lead).  Next to NB, it is one of the most balanced places to be a landlord

    Thanks for the clarification.

    In Texas, "Notice to Vacate" goes out on the 2nd day rent is not paid. Eviction filed with the county on the 4th and court hearing within 10-21 days after. In all, a deliquent tenant will be out within 30 days. Any short fall in court fees, rent or damages that exceeds the security deposit may be claimed through Small Claims court (another relatively simple process) but collecting will be difficult since we cannot garnish salary here, unlike in most Canadian provinces.

    Being there, done that.

    0Reply
  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Steven Woon

    Things are not that different here in New Brunswick.

    In NB, there is both a Notice to Vacate and a Final Notice to Vacate.   The first time one is issued, it is a Notice to Vacate, which gives the tenant 7-days to cure or 15-days to move.  If they address the outstanding amounts owed within the 7-days the order is rescinded.   Any subsequent offence is issued a Final Notice to Vacate which gives the tenant 7-days to cure and 15-days to move, but curing the outstanding amounts does not rescind the order (that is at the discretion of the landlord).   The appropriate version of the Notice to Vacate can be served the day after which rent is due (which is generally the 2nd of the month).

    If the tenants do not leave within the 15-day window of the Notice to Vacate, the landlord applies to the Rentalsman requesting an eviction which will happen in 7 - 20 days.  As a landlord, you may have to pay a sheriff to carry out the eviction and possible store abandoned chattel for a period, but just as frequently you will not.

    Security deposits here are limited to the amount of 1-month's rent, so they do not address much and small claims is your primary recourse {and the limit there was recently dropped from 30K to 12K}.

    0Reply
  • Stephen E.
    St Thomas, Ontario · Member since 2013 · 575 posts · 408 votes
    10y
    Originally posted by @Roy N.:

    @Steven Woon


    Security deposits here are limited to the amount of 1-month's rent, so they do not address much and small claims is your primary recourse {and the limit there was recently dropped from 30K to 12K}.

    Amazing that the limit for Small Claims Court was cut from $30k to only $12k. What was the rationale? In Ontario the limit for Small Claims has been going in the opposite direction - it is now $25,000. Of course then you have to collect...

    0Reply
  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Stephen E.

    It was a political decision.  However, to be fair it was raised from ~9K to 30K a couple of years before.   $15-20K with an inflationary increase would have been a more appropriate response.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free