NON REFUNDABLE RENTAL DEPOSIT. GOOD IDEA?

7 Replies

I am in the process of leasing out a rental unit. Its a low income neighborhood and the tenant had some financial hardships in the past which I have agreed to overlook in exchange for last month's rent up front (rather than collecting just the first month and a security deposit). 

The tenant has agreed but asked for an additional 15 days before they move in to get it all together. I am considering agreeing to this provided they submit a nonrefundable payment of $1,000 (two month's mortgage payments) right now up front to hold the property in case they end up bailing and the property goes vacant for several weeks. I know this is not a traditional method but it works for me because to collect that money up front would pay for my holding costs for 2 months regardless of wether or not they come up with the rest.  

I'm just trying to think through the best way to collect this "nonrefundable fee" in the safest way possible. Since they won't actually be signing a lease until the move in date, what would be the best possible way to write up the transfer of this fee and still be protected on all sides to be able to keep it if they decide to back out before giving the rest of the funds needed to move in (which of course I don't anticipate happening). 

I don't think you can charge a deposit that high, and keep it if their situation changes. Maybe this isn't the right tenant.

My tenants have to sign the lease and give me the security deposit with 3 days of passing credit and background checks.  I don't understand why there is a delay in signing the lease.

There are specific laws for each state on what you can collect . This sounds easy and innocent enough but be careful because if this goes bad you can be in trouble because a judge could potentially see this held back as a lease option fee or owner financing down payment if he gets a smart lawyer . Dodd frank act changed a lot on getting money from tenants and how that’s to be secured and what it can be considered . You could have to go through a foreclosure instead of an eviction if he can prove it was money to purchase . I could be way off but Just something to think about

This would be illegal where I'm from and if the deal didn't work out and it went to court you'd be paying the $ back plus interest and court fees.

They only owe you the security up front... and the rent on the 1st day of possession. If something bothers you about them as a tenant it's simple. They don't meet your screening requirements, move on to the next tenant. You can't change your business practices from one client to another. Keep it consistent and keep it legal.

Professional tenants that take landlords to court START with making you try and bend the rules. It sets a precedent in the judges opinion and it doesn't look good on you. It's a slippery slope you're treading on. If you feel you need to protect your investment more, have higher standards of clients. If you're going to provide low income housing, you know the risks associated. There will be higher turnover, changes are greater that you will have to evict tenants. 

I'm not sure how the $1000 relates to the value of the rental so I really can't say if it's a fair amount. But I can tell you what we do, we require the security deposit to be paid up front to hold the property, no longer than 2 weeks, as a deposit to hold. If they come through then the hold deposit is converted to Security Deposit but if they fall through then the Hold Deposit is forfeited, non-refundable. And you must give them a receipt spelling this all out and have them sign it.