Landlords' Security Deposit mistakes to avoid

It is a simple idea – you collect some money up front when a tenant moves in, use that money if you find any damages when they move out, and then return anything left over to the tenant. Security deposits are a vital part of being a landlord, since they can help offset the financial burden of needed repairs or missing rent payments, but there are a number of mistakes that landlords sometimes make when it comes to handling them. 

You may have read our previous post with a similar name, “5 Mistakes Landlords Make with Security Deposits.” We think this is a very important and yet often underappreciated topic, so this list will expand on that! 

Every state has its own set of rules that determine things like how much you can charge for a deposit, how those funds must be held, and how long you have in order to return the deposit back to the tenant once they’ve moved out, but there are also some general rules-of-thumb to follow in order to avoid costly fines, or even litigation. 

MISTAKE #1 - FAILING TO UNDERSTAND THE LAW 

As mentioned before, understanding the laws that are in place in your particular state is imperative, yet sometimes landlords neglect to note the details. For instance, for residential tenants in California (see California Courts website, here), you have 21 calendar days (not business days) from the date that the tenant moves out, before any remaining security deposit and a letter explaining what was used for repairs and what is being returned must be mailed to the tenant. Failure to do so could open you up to a lawsuit and an appearance in Small Claims court. 

Another example is knowing what constitutes “normal wear and tear” (which is something you cannot charge a tenant for) and what is chargeable to their security deposit. Being aware of these details can help you execute a good plan for the entire move-out process and ensure that you stay out of trouble, so do your research and keep up to date. 

One example of how to do this would be to join a trade group such as the California Apartment Association, which represents owners, investors, developers, and managers in the state of California. It is a trusted source of information, and the annual cost can be written off as a business expense.

MISTAKE #2 - NOT FOCUSING ON A STRONG MOVE-IN PROCESS

Other than the obvious tip of simply knowing the laws, the next mistake we see landlords make is not putting an emphasis on doing a thorough move-in process. 

Typically, when people think of security deposits, they think of the inspection that takes place once the tenant has moved out, and the calculation of all the damages that need to be charged. But a good move-out is really difficult if you have not already done a good move-in. 

For instance, in California, a landlord can charge a tenant’s security deposit for any work that is needed above and beyond normal wear-and-tear, and they can also charge for cleaning the unit, but only enough to get it back to the same condition that it was upon move-in. Justifying any of those charges and having them hold up in court is very difficult if you didn’t do a thorough move-in inspection and document everything in detail. 

Next, we’ll share some of Coastline’s best move-in practices, which have helped us get off to a great start with our tenants. 

We recommend a few things: 

1. Make time in your schedule to do a move-in inspection on the same day that the tenant is officially given possession of the space. Do the inspection on your own (before the tenant arrives) so that you can take your time and have no distractions. 

  2. Take plenty of photos and videos of the space and make note of any items that are in less-than-perfect condition, on a move-in inspection form. Once the tenant does arrive, walk them through the things you found and have them sign that form. 

  3. Next, in very open and clear terms, talk to the tenant about what the expectations will be upon move-out. Yes, it may sound like we are getting ahead of ourselves here (since we’re still talking about the move-in process) but, trust us, the tenant is most receptive to rules and the whole move-in/move-out process, when you are still holding the keys. 

  4. Lastly, let them know that they will be responsible for any damages beyond normal wear and tear, let them know what normal wear and tear means and give them examples, tell them that the space needs to be returned in the same or better condition than it's in now, any what they can and cannot do about making any changes to things such as the paint color. 

Remember, this is your time to get on the same page with your tenant and start the relationship off right, so try not to schedule a move-in an inspection if the tenant only has time in their schedule to simply pick up the keys, briefly walk the space, and then leave. Give yourself ample time and be thorough. 

MISTAKE #3 – NOT DOING A PRE-MOVE-OUT INSPECTION

When landlords think about the move-out process, they tend to think only of the final move-out inspection, that is conducted once the tenant has completely moved out; however, once a tenant gives you their 30-day notice, you should really consider scheduling a pre-move-out inspection with them as well. This inspection should be done a week or two before their move-out date, so that they have some time to address any issues beforehand. 

The goal here is (just like with the move-in inspection) to be open, transparent, and thorough when describing your expectations, so that there is as little miscommunication and misunderstanding as possible later, and so that you can lessen the chance of disputes. 

If they have left holes in the wall from hanging their TV or picture frames, let them know if they should repair those and if you charge to do it for them. If they have changed any of the paint colors, let them know if you require them to paint the walls back to the original color and what specific brand and color code they should use. 

While walking the space, point out any issues that seem to go beyond normal-wear-and-tear and let them know that they will be charged to fix them. If they have any dispute over this, it is much better to have that discussion now, rather than having it after they have moved out. 

Lastly, make sure you tell them that the pre-move-out inspection is only there to catch any glaring issues and lay down expectations, but that you still intend to do a final-move-out inspection, once they have completely moved out and all their belongings are gone, allowing you to look at every nook and cranny of the unit. 

MISTAKE #4 - NOT HAVING VENDORS AND QUOTES READY TO GO

Every state is going to have some kind of timeline that you need to adhere to when returning a tenant's security deposit and sending them an itemized list of what your charges were. But keep in mind that finding different vendors, having them go out to the property and look at the space, and then having them get back to you with a quote, can take up a lot of time. 

That is why it is a good idea to already have a few vendors on-hand (preferably ones that you have worked with in the past) and schedule a date to meet with them immediately after the tenant moves out. Otherwise, you are going to be scrambling to pull together some bids and schedule the actual work, before you can charge the tenant’s security deposit. 

MISTAKE #5 – NOT KEEPING DETAILED DOCUMENTATION

Having the right documents and keeping them well-organized can go a long way. First and foremost, your lease agreement should have a special section that talks about your security deposit policy. When a tenant signs the lease, they are binding themselves to that language, and this makes a world of difference when it comes to enforcing those terms when they move out. 

Still, as property managers here at Coastline, we know that just because something is written in a tenant’s lease does not mean that the tenant read it carefully or even remembers it. Therefore, it pays to be redundant and thorough in your communication and it is why we like to include a reminder of the security deposit policy in our Acknowledgement to Vacate letter, which we send to each tenant once they give us their 30-day notice. 

Once you complete any repairs and are ready to charge the tenant’s security deposit, good documentation for the work that was completed, and the costs incurred is essential. Your final disposition letter to the tenant should include an itemized list of all the work that was done (showing prices for each task) and the invoices that you paid to each vendor. Some smaller vendors may not be the best at providing you with detailed invoices so, if that is the case, ask them to call out specifics such as the area of flooring they had to repair or the labor-hours that it took them to repaint the walls. 

Lastly, oftentimes tenants who try to fight you on your security-deposit charges will try to say things like, “The apartment only needed repairs because you were not attentive to maintenance during their tenancy.” Assuming you were in fact attentive to their needs, having copies of all past communication, proof that you completed their maintenance requests, and any invoices that were paid, can help save you headaches. Using property management software can be the easiest way to keep all this documentation in one place.

MISTAKE #6 - NOT SCREENING THOROUGHLY ENOUGH

Finally, at the root of many tenant-related issues is the lack of proper screening before someone becomes your tenant. Proper screening must abide by Fair Housing laws (as well as local laws), so be sure to watch our videos and read our posts about that subject and do your own research.

Generally speaking, the screening process helps to decrease the odds that your tenant will have any major disputes or problems with maintaining your rental unit. While we all want to fill our vacancies as quickly as possible, waiting just a little bit longer to thoroughly screen prospective tenants can go a long way. Here are just a few things to look out for: 

1. Income – Does their household make enough income to comfortably cover the monthly rent? It is common for landlords to require that a tenant’s gross monthly income is something like two-and-a-half times greater than the monthly rent amount. 

  2. Debt – Does the prospective tenant’s credit report show a considerable amount of debt obligations, relative to their income? 

  3. References – Many landlords skip this part but calling the references that a prospective tenant lists on their application can be very useful. No, we’re not talking about their best friend or their sister. The rental applications (that we use here at Coastline Equity) specifically state that an applicant authorizes us to verify information by contacting employers and previous landlords. 

Now of course, even if the screening process goes well, that does not guarantee that your future tenant will not put up a fight when trying to get their entire security deposit back at the end of their tenancy, but this point still needs to be made because, again, proper screening is at the heart of mitigating your risks and setting yourself up for a good tenant-landlord relationship, from the start.