By Lauren Zumbach, Story by J.P. Morgan
With rents on the rise, some renters might be having a tougher time saving up for security deposits on top of initial rent and move-in costs. But reducing security deposits exposes property owners to additional risk. Here’s what to keep in mind if you’re asked for flexibility on a deposit.
How Large a Security Deposit Can a Property Owner Charge?
Security deposit laws vary by state, and cities can have their own rules, so it’s important to check regulations in your local area. Some states have no limits, while others may limit deposits to one to two months’ rent. Ann O’Connell, legal editor and attorney at Nolo, which has resources on security deposit laws, recommends property owners charge the largest security deposit the law or market conditions allow to reduce their risk if left with damage, or unpaid rent or fees at the end of a lease. If a property owner wants to reduce the up-front amount collected, they could consider dropping the last month’s rent requirement, because security deposits can be used to cover unpaid rent, O’Connell says.
(Editor’s Note: The maximum-security deposit that may be collected within the State of California is equal to two (2) months’ rent for an unfurnished rental unit and three (3) months’ rent for a furnished rental unit. However, if a tenant is on active military duty, then the maximum-security deposit allowed by law is equal to only one (1) month’s rent for an unfurnished rental unit and two (2) months’ rent for a furnished rental unit.)
What If a Tenant Asks to Pay Security Deposit in Installments or Deferred Payments?
Tenants have options in some areas, such as Washington, Atlanta and Cincinnati. Depending on state or local regulations, property owners might be required to allow tenants to pay deposits in installments or using rental security insurance. These requirements vary based on factors including the number of units the owner has and the size of the deposit. There are, however, risks to accepting installments or deferred payments.
“If a renter lives in the rental for two months, trashes it and breaks the lease by moving out … You could end up in a situation where not only does the tenant default and walk away, they never pay the deposit they agreed to,” O’Connell says. She advises documenting any agreement to defer payments, accept installments or reduce the deposit amount in writing and ensuring the deposit will be paid in full relatively quickly.
Should You Offer Security Deposit Alternatives?
The details of how these alternatives to traditional security deposits differ among the various providers. Some function like surety bonds, where tenants pay a nonrefundable monthly fee to the provider instead of an upfront payment. If they cause damage or leave with unpaid rent, the company pays the landlord’s claim up to the maximum amount covered, then seeks repayment from the tenant. Others might charge a monthly fee to place a hold on a tenant’s credit card or bank account, so they can be charged if needed.
Alternatives can be a good option for people who would struggle to afford a lump sum security deposit — and property owners renting to them — but they can also carry risks, says Eric Dunn, director of litigation at the National Housing Law Project. Nonrefundable payments mean tenants can end up paying more than they would with a traditional security deposit. Some products are also marketed as security deposit insurance, which means tenants may wrongly assume they are covered for any damage, Dunn says. It’s also unclear whether some state consumer protection laws governing security deposits, like requirements to let tenants know what damage they’re being charged for, apply to these products, he says.
O’Connell says property owners need to do their homework before partnering with a security deposit alternative provider to ensure the company is reputable and that they understand how claims will be handled. “Is it going to tie them up in red tape? Is there a higher standard to pay out for damage?,” she says.
Should I Let Tenants Apply Their Security Deposit to Last Month’s Rent?
“It’s a big no-no,” O’Connell says. “Even if the tenant is fantastic, you don’t know what could happen when they’re moving out.” Give tenants a list documenting what’s expected at move-out and do the final walk-through with the tenant to avoid surprises and disputes over deposits, O’Connell says. Both property owners and tenants should also document the unit’s condition at move-in and move-out. “With smartphones, there’s no reason not to take pictures of everything,” she says.
(Editor’s Note: In California, housing providers must provide a reconciliation with any deductions and refund of the balance of a security deposit within 21-calendar days of termination of a lease.)
What About Deferring Part of the Security Deposit to Pet or Cleaning Fees?
Be cautious about charging nonrefundable fees labeled for a specific purpose, like a cleaning fee or pet fee. If actual cleaning or pet damage costs exceed the fee, the property owner might not be able to use the security deposit to cover the extra cost because they charged a fee for that purpose, O’Connell says. Sticking to a broader security deposit provides more flexibility, she says.
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