Security deposits are funds you hold in case there’s more than typical wear and tear to your property when a tenant moves out. The amount you charge for a security deposit matches the risk of the tenant, which you find out during the background and credit check.
A security deposit is supposed to protect you from loss. It’s not free money for you to touch. If you mismanage deposits, you can run into trouble that will cost you. Here’s how to manage them the right way:
Keep Security Deposits in Escrow
A security deposit should never sit in your personal bank account. It’s a conflict of interest. The deposit is still your tenant’s money; you’re just holding it for collateral.
Keep the deposit in an escrow account to avoid co-mingling funds. Mixing a security deposit with your money or using it while a resident lives in your home can get you in a lot of trouble.
Only Use Security Deposits After a Resident Moves Out
Residents can’t use the security deposit during the lease term either. Sometimes they’ll ask to borrow money from the deposit for rent, repairs, utilities or other costs they can’t afford while living in the home.
You should never consider these requests. Only after a tenant moves out at the end of a lease (or due to eviction), should you use the security deposit to recoup any loss from rent or repairs.
Return Security Deposits With Urgency
In Texas, you have 30 days after a lease expires to return a security deposit. If you don’t send out the deposit within that timeframe, a resident can bring a case against you. You’re guaranteed to lose the case if you can’t prove you sent the deposit within 30 days.
A tenant may also be able to sue for three times the amount of the deposit if you don’t abide by the 30-day rule. We’ve seen a landlord pay out $20,000 to a tenant because they mishandled the deposit. For this reason, performing the final inspection and returning funds on time is something you need to take seriously.
Clearly Define What You Deduct From the Deposit
If you take money from a resident’s deposit, you must send an itemized statement within 30 days. The statement should show the charges in detail.
Take a good amount of photos before a resident moves in and after they move out. You’ll need them as evidence to back up charges if they dispute the statement.
Even if your tenant doesn’t give you a forwarding address, you should make every attempt to get the final statement or deposit to them. The last resort is sending documents to their last known address – your property.
Hopefully, they forward mail to their new place. Either way, you can prove you made an attempt to send them the statement or deposit.
Security deposits don’t have to be problematic. Our property managers can help you. Contact us for a free consultation to make sure you’re handling security deposits correctly.