RENTAL PROPERTY SECURITY DEPOSITS:
ALL YOU NEED TO KNOW
One of the more common headaches that comes with owning and managing rental properties is the appropriate handling of tenant security deposits. Like all things real estate, laws will vary from state to state but the overall logic and objectives are typically similar. To provide structure and consistency to our conversation, we’re going to focus on Rhode Island law. We’ll expand on what the security deposit can and can’t be used for, proper procedure and best practice for returning (or not returning) deposits, and the possible repercussions for failing to meet legal requirements.
1. FIRST THINGS FIRST: WHOSE MONEY IS IT?
Let’s take a quick second to establish an important fact: the security deposit is the tenant’s money. When they give it to the landlord, or property manager, they are handing it over for the property owner’s benefit, but the money does not belong to the property owner. He or she cannot use it as they please and instead are supposed to hold it in a separate account. It is to be held until the tenancy ends.
2. CAN THE SECURITY DEPOSIT BE USED TO COVER THE LAST MONTH’S RENT?
In most states, including Rhode Island, the simple answer is: no, tenants cannot just decide not to pay the last month by claiming the security deposit will cover it. The security deposit exists to create a safety net for the owner. It is used to cover any damages that exceed “ORDINARY WEAR AND TEAR”. If a tenant claims they’ve maintained the property and they don’t need to pay the last month, they are incorrect (in most states) and will need to be reminded of what the security deposit is for.
In Massachusetts, and possibly in your state, the law reads a little differently. In the Bay State, tenants provide first and last month payments upon move in so the expectation is very different. For that reason, many property owners require, first, last, and security up front to ensure they have that all important safety net when it comes time to assess damages.
3. WHAT ARE THE GUIDING RULES FOR REFUNDING TENANT SECURITY DEPOSITS?
As mentioned above, the legal standard is that damage needs to exceed ordinary wear and tear to warrant use of the security deposit. When a tenant officially vacates, most often upon return of their keys, you can then, and only then, go in to assess the damages. A general approach can be to look for any damages that look intentional or are the result of neglect. Rhode Island law defines ordinary wear and tear as “non-abusive living circumstances”.
The most common items we see as normal (and not covered by the security deposit) include: nails or holes left by nails (typically for hanging photos), curtain hardware, dirty bathroom fixtures, rugs that look used, etc. If cleaning, painting, or simple patchwork are the remedy, it is not excessive damage.
The most common issues we see as exceeding ordinary wear and tear (covered by security deposit) include: missing cabinet doors, damaged appliances, fist-sized or bigger holes in walls, severely stained carpets (think red wine and cigarette burns), etc.
[ Speaking of stained carpets, Learn More: BEST FLOORING OPTIONS FOR RENTAL UNITS ]
With all this being said, it is important to be aware that THIS IS ALL A GRAY AREA. Supporting your opinions regarding the degree of damage can be very subjective and you need to have an organized and transparent approach. Very rarely are these issues black and white and you need to be able to support your conclusions should you be sued.
4. WHAT IF I JUST USE THE DEPOSIT FOR WHATEVER EXPENSES I HAVE...WHAT’S THE WORST THAT COULD HAPPEN?
Remember, the security deposit exists for the property owner’s benefit but the rules need to be taken seriously. Tenants have the ability and right to sue landlords who don’t adhere to the ordinary wear and tear standard. State regulations will vary, but using Rhode Island as a guide, tenants can sue up to 2 or 3 times the security deposit amount plus all court fees. In other words, trying to push the envelope to save $500 could cost you closer to $3000.
5. WHAT ARE NEXUS’ BEST PRACTICES FOR DEALING WITH SECURITY DEPOSITS?
Nexus prides itself on efficiency and being solution driven. Thoughtful communication is the key to strengthening relationships and a focus on finding efficient solutions is essential in this case as well. Here is the procedure we have developed for our clients:
- Inspect the unit: After the unit is vacated and we have the keys in hand, we’ll do a physical walk through.
- Create Condition Report: From that walkthrough we’ll create and provide a report that lets the owner know which items are broken and/or need attention.
- Create Inspection Video: At the time of walkthrough, our technician will also create a narrated inspection video to support the Condition Report and provide greater context.
- Provide Homeowner with Suggested Amount of Withholding: We’ll provide our own experience based expertise to help owners better understand what exceeds ordinary wear and tear and we’ll provide a specific dollar amount. This is the amount we believe they are entitled to withhold from the security deposit.
- SEND TO VACATING TENANT: This is the biggest step in the process. We send our findings and recommendation to the tenant and ask them for their feedback BEFORE making anything official. In this way we are soliciting their opinion in an inclusive way that engages them in the conversation. They might disagree and might have photos or documentation to prove it…or…they might be more agreeable because of the informal and more respectful step you’ve taken. If you’ve got your house in order, there’s only upside.
By adopting this approach you’re taking the steps to get to the most agreeable (and accurate) solution possible for both parties in a way that will minimize animosity. Through this conversation, you also create (gather) timestamped and documented “agreeance”, should anything turn sideways later on.
Rhode Island law mandates that you send an itemized list of expenses along with the check (you’ve already taken costs for damages out of) and if you just follow these simple guidelines, rather than Nexus’ best practices, don’t be surprised when blowback gets ugly. For more specific examples, be sure to watch the video above: A Good Pointer For Refunding Tenant Security Deposits
6. I HIRED A PROPERTY MANAGER…BUT WHO SHOULD BE IN CHARGE OF THE SECURITY DEPOSIT?
This situation can get a little messy so it’s important to have a consistent approach. For us it’s pretty simple: whoever received the initial security deposit holds on to it and is responsible for returning it when the time comes.
If you hired Nexus and then we placed your tenants, we would’ve collected the first month and security deposit up front, so we’ll hold on to it and manage it for the property owner. If the owner placed the tenant or if the tenants were placed before Nexus was brought on board, it is the owner’s responsibility.
If you’re an owner, you might be thinking it makes more sense just to hand the deposit over to the company you’ve hired since they’re handling the rent, maintenance, and management…but here’s why we don’t do that: We can’t verify the condition the property was in when the tenant moved in. With all tenants we place, we can ensure the unit is rent ready because we won’t place tenants unless that’s the case. With that policy in place, there is no debate when the tenant leaves. We have the condition of the unit documented through video. When we inherit a tenant, we simply can’t verify the condition of the unit when they moved in so we can’t confidently make decisions regarding security deposit withholdings.
If you’re managing your property without the help of a professional, go ahead and create a system of documenting the conditions of your property (photos, videos) to make life easier down the road.
7. HOW LONG DO I HAVE TO MAKE A DECISION/RETURN THE DEPOSIT?
In Rhode Island you have 20 days to return the security deposit to the former tenant. This timeline will vary from state to state but we’re happy to help you track down your requirement if you’re having a hard time locating it. Contact us directly.
Security deposit management should be easy but all too often it gets a bit complicated and occasionally gets ugly. If you’ve given any thought to hiring a property management company, this might be a reason to push you in that direction. Having an experienced professional in your corner can pay huge monetary dividends and will also go a long way in reducing stress when it comes to issues like this. Reach out to our team at any of our four locations across New England for more information about our services.
Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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