Security Deposits and Real Estate Leases

Security Deposits and Real Estate Leases

The Purpose of a Security Deposit

As a landlord, you are entrusting your property to the care of a tenant, and many things can and do go wrong. The security deposit helps you cover damages, excessive wear and tear, unpaid rent or other unmet conditions of the lease. It also acts as an incentive for the tenant to pay rent on time and avoid damaging the property.

Determining the Amount of the Security Deposit

The laws on security deposits vary by state. In most cases, the dollar amount you can require from tenants is based on the monthly rental value. While some states set no fixed amount, many states enforce a maximum that is anywhere from one to three month's rent.

Holding a Security Deposit

State laws often specify how security deposits should be held and whether interest must be paid. In many states, a security deposit must be placed in a separate account and cannot be mixed with personal or other business accounts. Some states even require you to place the security deposit in an interest bearing trust account and award any accrued interest to the tenant.

Applying a Security Deposit

State laws may also dictate how a landlord applies the security deposit at the time of move-out. Depending on your state, a security deposit may be used to cover unpaid rent as well as any damages to the property beyond reasonable or expected wear and tear. You may also be entitled to use a security deposit to cover unpaid utilities or to clean the premises when the tenant vacates the property. In some cases, you may even use the security deposit to restore or replace personal property rented to the tenant. Check with your local housing agency for additional information on using security deposits.

Returning a Security Deposit

The timeframe for returning a security deposit also varies by state, ranging from 10 to 45 days or more after the tenant has vacated the property. When withholding money from a security deposit, landlords are usually required to account for any deductions with an itemized list of damages to the unit. This list is typically sent to the tenant's last known mailing address two to three weeks after the tenant moves out.

Normal Wear and Tear

"Normal wear and tear" is a subjective assessment based on the total time a tenant occupied the premises, the condition of the unit on move-in, the use of the premises and whether pets were allowed. The longer a tenant lives in a rental unit, the more likely it is that "normal wear and tear" will occur. Examples of normal wear and tear include worn floors, chipped paint, dirty air filters and broken hinges. Excessive wear and tear may include damage to walls (holes), cigarette burns in carpeting, damaged plumbing and removed items. In order to get a fair assessment on move-out, many landlords conduct a walk-through before the tenant vacates the unit and notifies the tenant of any damage he or she deems abnormal. Some states actually require you to give tenants notice of the inspection and allow them to attend. To find out the laws in your state, contact your local housing agency.