How Quickly Should Landlords Return Tenant Deposits?

by | BiggerPockets.com

How quickly should landlords return deposits to exiting renters?

This can be quite a contentious area for many real estate investors and rental property owners. Some set high deposits with the intention of keeping it all. Others are new and just aren’t sure what the best practices are. So, what’s the best protocol?

5 Tips Regarding Tenant Deposit Returns

1. Know the law.

The first thing is to know your local landlord-tenant laws. You may be limited in how much deposit and upfront money you can ask for. There is likely also a set timeline for refunding deposits and explaining any adjustments to tenants. Exceed this timeline, and you could be liable for paying back the deposit in its entirety even if there are damages to your property outside of normal wear and tear. You may also need to be able to document any deductions in the amount you are returning.

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2. Understand what reasonable deductions are.

Your lease should lay out the conditions under which you have the right to deduct monies from the deposit refund. This typically comes down to whether or not there is anything beyond “reasonable wear and tear.” This can get quirky when you’ve taken over a property with an existing tenant or you’ve had a renter in the unit for several consecutive years.

Related: The Landlord’s Itemized List of Common Tenant Deposit Deductions

You should do walk-throughs with sellers when buying the property and address any concerns then—before they transfer deposits to you. Also, keep in mind that there can be a big difference between normal wear and tear over 12 months and over 36 months. If you’ve had the same tenant for three years, there may be worn carpet, loose cabinet doors that you put in DIY-style, peeling paint, etc. Try to stretch too far, and they may just try to sue you or take you to small claims court. Your time and costs could be more expensive than what you try to pocket. So, it may be wise to slightly err on the side of caution.

3. Keep the dynamics of renters in mind.

If your tenants are leaving, it is typically to go rent somewhere else. Most people simply don’t have the financial surplus to put deposits all over town. They are probably counting on that money to move in to the next place. If they don’t get it, they could wind up in a hotel with their kids. That may not be your problem, but it is worth thinking about.

4. Identify damage.

Of course, you don’t want to overlook damage and be out of pocket for more than you should be either. Do get out to inspect, and do it in a timely manner. Make sure you have records of the move-in inspection so that you can compare. Today, it’s very easy to store this data online, along with pictures and maybe even video. This can become very important when you have other investors or you are managing rentals for others. You are accountable to everyone.

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5. Remember that your reputation precedes you.

Some landlords are very poor in this area. Today, tenants will leave you bad reviews online and file complaints. If you get a bad reputation for keeping deposits, then others won’t make an effort to keep your place right or clean on exit. They may not pay the last month’s rent. They’ll assume you are going to keep their deposit. Some will try to beat you to the punch to not lose out.

Related: 5 Ways to Deal With a Tenant Owing You More Than Their Deposit Will Cover

This can impact the industry, too. In areas where this is bad, people are not going to want to pay deposits, and they are going to have their guard up and are going to be harder to deal with from application to exit. Now, contrast that with renters seeing good reviews on a local landlord or property management company. They may be glad to make a good deposit and may go the extra mile to patch nail holes from pictures and touch up chipped paint before moving out. In some rare cases, you might even get an amazing tenant who upgrades light fixtures, fans, switch-plates, etc.—and even has the place professionally cleaned the day they move.

Summary

You may have 30 days to return a deposit (or to explain why you aren’t). You may not want to abuse that. At my organization, we do the walkthrough with the tenant as they move out. During this time, the property is inspected to ensure there is no damage outside of normal wear and tear. If there are questions, they can be documented and discussed then and there. This mitigates the back and forth that will occur in the event you retain security deposits to cover those costs. Discussing in-person will set the expectation up front, increase operational efficiency, and help to avoid legal issues or unfounded complaints.

How do you handle returning tenant deposits?

Leave your comments below!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record.

10 Comments

  1. Barry O.

    Great article!
    The Deposit money should be returned as soon as you know what the deductions are( if any) and you are sure there are not going to be any further surprise damages.
    One of the major rental agencies in my town went under because they continually didn’t respond to their renters requests for repairs and always kept the damage deposits. They forget who their customers were!
    In my case a renter moved out and my painter told me he was patching the walls. Since there where none during the walk though I was a little shocked. Later he showed me a surfing sticker that had been put over the hole and speckled and painted to camouflage the hole. After the deduction, his damage deposit was mailed, in his hand and cashed well before the 21 day return to tenant requirement in California.

  2. Nate Reed

    #1, Knowing the Law, is a prerequisite for anyone in business. There is no excuse to not knowing the rules.

    Damages/fines for not returning a tenant’s deposit within the timeframe specified by law can be steep. I know of one civil case that went to a jury trial in which the landlord was hit with a $10k judgement.

  3. good points all of them! In our case there is no rhyme or reason or steadfast rule other than state statute…..i have given back deposits with 72 hours and later found the tenants had rigged the electric meter to steal power, found that 3 weeks later it cost me 1000.00 to replace the meter loop as the power company cuts the weather head upon any tampering……other tenants planted flowers, brought in other tenants , helped us keep an eye on the property and they received their deposit with a few days……other tenants are sloppy, ( but they pay rent) and when they do move we will have to fumigate, and repair quiet a bit—–we dont kick them out as they have been renting 15 years , have paid over 90,000 dollars we are expecting a full blown refurb when and if they ever do go- ….I’d recommend you follow the law and your heart…usually works…..22 years and we have never been in court ;>

  4. Chad Smith

    I just dealt with this – the utilities here in Boulder recommend also waiting until the final water and electric bills are paid by the tenant prior to returning the deposit, otherwise the final bill amount gets put on the home owner/new renters…

    Have folks run into this ?

    • Sterling White

      I have not ran into this just yet. I do have rentals in which the water company does bill the property in the event the tenant does not pay. I have not had to retain a security deposit to cover these costs thus far.

      Hope that answers your question.

  5. The concept of this blog is very interesting. There are many tips which can be helpful to tenants to do deposit returns. It’s very interesting to know that tenants are been given review to know about tenants

  6. I would re-emphasize that damage deposits can and should be used to pay unpaid utility charges that are the tenant’s responsibility. It is up to you to verify that all utilities were paid because in my state and city these bills will become a lien on the property if not paid. I call to see what the final bill amount is after a tenant finishes moving and the utilities are switched to me. I then call the tenant and let them know that I am eager to return their deposit, but cannot do so until this bill is paid. I then offer to deduct it from their deposit and pay it myself if they prefer. Tenants who are strapped for cash are happy to do this. Other tenants prefer to pay the bill themselves, then send me verification that it was paid. I also let the tenant know immediately after I inspect if there are any items that woud be deducted and ask them if they would prefer to take care of the issue so that it is not deducted from their damage deposit. This keeps things friendly. If I deduct for stove cleaning due to them leaving an extremely dirty oven they get mad and threaten to sue me. If I offer to let them clean it, they usually tell me that they prefer that I do it and deduct from their deposit since they are busy moving into their new home. People just like to be given the choice.

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