Security Deposits Do's

A security deposit helps ensure a tenant will comply with the provisions of the lease regarding damage to property and cleaning it prior to moving out. Here’s what you need to do to make things go smoothly.

Take It Seriously
Recognizing that a security deposit is a commercial transaction that needs to be handled properly is your No. 1 priority, says Bill Lederer, founder, Completelandlord.com, and author of a series of Completelandlord.com Guides for John Wiley & Sons. In some states, tenants can recover up to two to three times the security deposit, plus attorney fees and other damages, if the landlord has intentionally and flagrantly violated the law.

Get It in Writing
The security deposit must be in writing and agreeable to both parties as part of a properly executed agreement. “Otherwise the property manager is guilty until proven innocent,” Lederer says.

The agreement should establish the condition of the property at the beginning of tenancy and describe the expectations between the parties at the time of exit. “It’s not unusual that the language used is too simplistic,” Lederer says. “Expectations should be clearly spelled out.”

For example, you could include a list of typical costs that would be deducted for specific damages. But you can’t make deductions for normal wear and tear.

A security deposit can either be written into the lease or written as a separate addendum. In addition, a security deposit should be signed in the name of the corporate entity or property management company—having the landlord personally sign it is not sufficient.

When drawing up a security deposit, take a look at your specialty dwelling property casualty policy to determine what is covered when the amount of damage exceeds the deposit. You might consider requiring tenants to carry property insurance to shift some of the burden to them.

Check Landlord-Tenant Statutes
The amount of a security deposit is negotiable between the property manager and tenant. Typically the security deposit is equal to one month’s rent, but you might want to consider charging more if the unit is furnished or you are including other items that add value to the property as part of your lease.

Check Market Conditions
Charging an exorbitant amount in a tough market might not be worth it if it results in an extended period of vacancy.

About half the states limit how much you can charge, usually no more than two months rent. Security deposit laws differ by state and sometimes by county, so check local landlord-tenant statutes.

Who collects the interest on a security deposit is also negotiable, except in states or counties where law requires landlords to pay tenants the interest that accrues.

Use Common Language
Watch your language, and don’t use jargon or legalese. Some states require the agreement to be written in plain English. Courts will typically rule in favor of less educated tenants if legalese is used. Also, some states require a parallel agreement in both Spanish and English.

Use a Separate Account
Always collect the security deposit, as well as the first month’s rent, before the tenancy starts, typically when the lease is signed. Never accept cash. And always issue a receipt that includes the tenant’s name and apartment number, along with the bank, account number and deposit amount.

Do not agree to have the tenant pay the security deposit over several months. You are only setting the tenant up for failure.

Put the security deposit in the bank the day you receive it and keep it in a separate account. Do not comingle it with the property manager’s personal or operating checking account. Separate accounts are required for HUD loans and by law in some states.

Be Clear in Returning Deposits
Make the conditions of releasing the security deposit very explicit in the agreement. You should try to settle the security deposit upon exit of the tenancy. Typically the security deposit must be returned within 14 to 30 days of exit, depending on local requirements.

The agreement should also include sublet provisions. If the tenant is subletting with the approval of the landlord, it does not release them from their obligations upon exit.