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Security Deposit Accounting and Disclosure

“So, when will I get my security deposit back?” The words that make any landlord shudder. But no longer. With this simple how-to, you’ll feel empowered to handle the conversation tactfully and even keep your first security deposit.

 First and foremost, be sure you don’t ever promise to return the deposit to your tenants. When they ask the dreaded question, communicate a timeline. Consider letting them know you’ll be conducting a pre-move out inspection. You should also provide them the checklist you’ll use so they can take care of any minor dings, fill any nail holes, etc. 

 Let them know you’ll assess the property again after move out and that you’ll return the held deposit, if applicable, in accordance with state laws. Every state has different requirements surrounding security deposits and the timeline in which to return them, so be sure to consult your state and local laws.

Then, when you do have to keep a security deposit, you will not have given any false sense of hope that you’ll return it.

 The most important part of keeping a security deposit is documentation. A clear paper trail is paramount to retaining the security deposit with less of a fight.

 So, when can you keep a security deposit? 

 Damage

 Generally a security deposit is held for damages to the property. Often, tenants will contest these damages, contending the property was in that state when they moved in. To protect against this objection, make sure you do a move-in checklist and a move-out inspection to support and document why you’re keeping it.

 Some damage that warrants retaining the security deposit include:

  • Holes in the walls
  • Holes or large stains in carpeting
  • Water damage
  • Missing smoke or carbon monoxide detectors
  • Cracked countertops
  • Broken windows or doors
  • Keys not returned at move out
  • Unauthorized pets or pet damage

 Financial

 Many times, landlords forget that the tenant deposit is held to secure against anything that goes wrong during the tenancy. That includes when tenants do not uphold their financial obligations. These deposits are a way of recuperating some of your loss in the event that tenants:

  • Missed rent payments
  • Break the lease early
  • Unpaid utilities
  • Unpaid HOA fees

 Document 

 All of these damages and skirted financial obligations warrant a landlord keeping some or all of the deposit, and it is of the utmost importance to document everything. Yes, everything. That means the receipts for renting an industrial rug cleaner from your home improvement store, labor from your handyman to repair the broken cabinet door. It also includes the letter from the electrical company regarding nonpayment. Keep it all.

 Communicate

 You will have to communicate with your tenants regarding keeping their security deposit. It’s helpful to use a form letter like this one, and provide all of the related documentation. As always, consult your local and state laws to ensure you are in compliance.

 Using this security deposit ledger in combination with a condition report will be extremely helpful and ward off potential objections from lessees.  

 

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