August 31 st can be a scary day for property managers and owners in Boston, New York, Raleigh-Durham, and other college cities. It’s a day when the bulk of leases expire, and new tenants prepare to move in. Ideally, the process goes smoothly—student residents vacate and leave their apartment in tidy order.
When things don’t go as planned, property managers can be left scrambling to make costly repairs before new tenants move in. The process can be all the more stressful if a portfolio has multiple units turning over at the same time.
Seasoned managers will have collected a security deposit in advance to be put toward such damages. However, managers should use caution before claiming it. Improperly managing security deposits can be costly. Managers can face steep fines and penalties, and in the worst of scenarios, might find themselves subject to a lawsuit.
Here’s a brief overview of what managers need to know about managing security deposits. First and foremost, it’s essential to understand that every state has its statute that outlines security deposit rules and regulations. A state-by-state overview from 2014 can be found here. It’s a cursory overview and isn’t fully updated. Nevertheless, it is critical that landlords know the rules that govern security deposits in each of the states that he owns rental property.
Upon Signing a New Lease
Best practice for managing security deposits begins at the signing of a new lease. Property managers should collect the security deposit per state laws, starting with the amount received. For instance, landlords in Kansas can collect a maximum security deposit of one month's rent for unfurnished units in Kansas. If the unit is furnished, a landlord can charge a maximum of one and a half month's rent as a security deposit.
Connecticut landlords can hold two months’ in escrow only if the tenants are younger than 62; they can only collect one months’ security deposit if tenants are 62 or older. In Florida, landlord tenant law does not limit the amount of security deposit that a landlord can charge. Even though there is no limit, in most cases, landlords will not charge more than two months' rent as a security deposit.
Upon collecting a security deposit, managers should issue tenants a receipt indicating how much was paid, to whom and when. Landlords should keep a copy of this receipt for their records, as well. The security deposit should then be held and/or deposited per state regulations. In Massachusetts, for example, owners must open a separate escrow account to maintain the security deposit there to prevent “commingling of funds.”
What’s more, the escrow account must have the resident’s name on it, too—not just the landlords. This means that the resident must provide the landlord with his/her social security number and sign bank paperwork. It’s a headache, but necessary to protect landlords from being subject to fines equivalent to three times the amount of the security deposit (otherwise known as “treble damages”) down the line.
On Move-In Day
As soon as a new resident moves into a unit, landlords (or property managers acting on their behalf) should conduct a walk-through of the unit with the resident. Allow the resident to fill out an “existing conditions” form to document any damages or repairs that were caused by previous tenants.
Both the landlord and resident should sign the form and retain a copy. There have been instances in which a tenant has argued in court that the existing conditions form had been altered by the landlord after the fact, so it is best practice to use a carbon-copy form to prevent a similar dispute. Supplement the arrangement by taking “before” pictures as a reference in the event of a security deposit dispute.
When a Resident Vacates the Unit
If time allows, the landlord should conduct a walk-through inspection of the unit as the resident is preparing to move out. Doing so will enable the landlord to point out any damages or repairs that are necessary and will allow the resident to fix the issues before the landlord claims against his or her security deposit. This is a good-faith gesture that most residents appreciate, even if not required by law.
Sometimes, residents are unwilling or unable to be present at the walk-through. In instances such as these, the manager should still walk through the unit after a resident vacates and note the condition of the property. If there is no reason to make a claim against the security deposit, landlords should return security deposits promptly and per state law.
The deadline can vary drastically by state—many jurisdictions give landlords 30 days to do so, but in Tennessee, landlords only have 10! In Georgia, a landlord must return the resident's security deposit within one month after the tenant has surrendered the rental property to the landlord (that is, returned the keys and vacated the property).
If a Claim against a Security Deposit is Necessary
Unfortunately, things don’t always go as smoothly as landlords would hope. So what do landlords need to do if they are planning to deduct from a tenant’s security deposit?
Be sure that all deductions qualify. Most states allow a landlord to use security deposit funds to recover the costs of unpaid rent and damage to the unit above normal wear and tear. However, in some states, like Indiana, landlords can recover delinquent sewer and utility bills. Iowa law allows landlords to keep the security deposit to put towards the cost of recovering possession where the resident withholds “in bad faith.” In other states, eligible expenses are not governed by statute at all, but rather by the terms of the original lease agreement.
Document all damages. Interestingly, not all states require a walk-through inspection before claiming the security deposit, but it is still best practice to do so. As noted above, landlords should try to arrange for the tenant to be present at this inspection—this will go a long way toward minimizing deposit disputes. Take pictures of all damages (ideally, landlords will have “before and after” photos of the unit to offer as a comparison in the event the tenant disputes claims). Also, a landlord should keep detailed records of all unpaid rent, utility bills and other expenses that are not necessarily “damage” related, so he has that proof as well.
Prepare an itemized list of all deductions. The itemization should be in writing and state how the deposit will be applied toward back rent, cleaning, repairs, or other financial obligations required under your lease or rental agreement. List the item (such as repainting the living room or five days’ unpaid rent) and the dollar amount of the deduction. Attach receipts and invoices for all repairs, or include a reasonable cost estimate for those repairs. A template itemization form can be found here.
Avoiding Disputes from the Outset
Of course, the best way for landlords to avoid security deposit disputes is to prevent a conflict from occurring. Our best advice to that end: Actively communicate with residents throughout their tenancy, and set expectations from the outset. Who’s responsible for what maintenance and repairs? Who pays which bills? Managers should keep lines of communication open – especially if there’s any sign of property damage or if they start to have concerns about a resident’s activity. Resident turnover is inevitable – but security deposit disputes don’t need to be. Managers who follow these guidelines will be better protected in the long run.