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?
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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.
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.
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.
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?
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