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10 security deposit management mistakes to avoid
Security deposit management is an important process, but it’s not necessarily an easy one. Residents often don’t understand what’s required of them to get a full refund and write negative reviews when they get less money back than they anticipated. Compliance regulations vary by jurisdiction and frequently change, and if you don’t follow the requirements, you’ll get hit with security deposit fines. Here are some of the most common security deposit management mistakes and some tips for avoiding them.
1. Not taking a security deposit at all
To avoid the hassle of security deposit management, some properties no longer require security deposits. Instead, they bill residents every six months for identified damages or charge a non-refundable monthly fee.
While these alternatives may sound good on the surface, they don’t necessarily ensure that your asset is fully protected or that you’ll avoid security deposit fines. They also don’t ensure that properties and residents share the same objective—to have a well-cared-for unit at move out. When a resident receives a bill for damage changes every six months, it can also create ill-will with current residents and create more conflict for you to manage.
2. Charging too much or applying inconsistent rules
Many, though not all, states have security deposit laws and limits. For example, you can charge up to two times the rent for an unfurnished apartment in California. In Oregon, there is no limit, and in Arizona, the limit is up to one times rent.
A common security deposit management mistake is to assume that this limit only applies to a security deposit. Instead, it represents the total amount you can charge for refundable deposits—security, pet, storage, etc.
Properties can charge additional deposits if the applicant does not meet basic qualification criteria (likely based on credit score, eviction record, and income) and is “conditionally” approved. However, the same formula must be applied consistently regardless of race, color, religion, sex, familial status, handicap, or national origin.
3. Not clearly delineating between fees and deposits
In an effort to increase their risk coverage, many properties are now charging non-refundable fees and refundable deposits. Common examples include cleaning and pet fees, which a resident pays regardless of the condition of the unit at move-out.
While these fees can make a lot of sense, the difference between refundable deposits and non-refundable fees can be confusing for residents. For example, if you almost always charge for cleaning, even if a resident spent all day cleaning their unit, you should note this as a fee. You’ll prevent disputes, negative reviews, and security deposit fines for your property—and unexpected costs and heartache for residents.
4. Holding deposits, co-mingling funds, and not paying interest
More than half of states in the United States regulate where and how deposits should be held. Most require the money to be held at a federal bank, and a few specify that it must also be a trust account or held escrow holding. Typically, deposits must be transferred to an account designated for deposit holding and the funds cannot be commingled with other operating funds.
Other security deposit compliance areas to watch for include interest earnings, including when that interest must be distributed to the resident. Interest tends to create distrust and confusion among renters—many fear that properties are profiting from their money being locked up during the lease.
5. Accidentally charging for wear and tear
Distinguishing between normal wear and tear and resident-caused damage is a common cause of security deposit management mistakes. No matter where your property is located, you cannot legally charge a tenant for deterioration caused by normal wear and tear.
Wear and tear is a form of depreciation that is assumed to occur even when an item is used with care and is properly maintained. For example:
|Wear and Tear||Damage|
|Carpet wear caused by normal use or furniture indents in the carpet||Burns or pet stains on floors|
|Faded paint or wallpaper due to sunlight||Holes in walls (beyond pinholes)|
|Broken plumbing caused by normal use||Clogged pipes|
|Dirty blinds and/or faded curtains||Broken blinds or ripped curtains|
|Warped doors caused by age, temperature or moisture||Damage to the door|
|Warped windows caused by age, temperature or moisture or flow of glass||Broken window or missing screen|
|Broken appliances from age||Broken appliance from misuse|
|Lose grout around floor tiles||Broken or missing tiles|
More and more states have moved to require itemization of damages so renters can have transparency into what charges were their fault and how much cost they can expect. Some jurisdictions even require that your repair or replacement charges must align with a specified depreciation schedule.
6. Insufficient damage charge documentation
In order to collect damage charges and avoid security deposit fines, you need a very clear paper trail. In some states, an item must be specified in advance in the lease in order for you to charge for repairs or replacement. In others, you must notify the resident in advance of deducting any of those charges, so they are not surprised or can dispute those charges before a refund is issued.
The majority of states now require properties to provide residents with an itemized list of damages. (According to a Roost security deposit renter survey, just 29% of those surveyed reported receiving a cost list and condition information.) Although most states lack detailed guidelines, it’s clear that simply stating a group charge for “damages” is not enough. Charges must be specific. For example:
Broken patio blind fixture $50.00
Carpet damage $412.50
Missing gym card $50.00
Oven cleaning $35.00
Wall damage above patio door $25.00
In some states, avoiding security deposit management mistakes for documentation takes even more care. In California, you’re required to provide receipts for any charges more than $125. To ensure security deposit compliance in Portland, Ore., for labor costs greater than $200, you must prove that costs are typical within the region.
7. Forgetting to provide a required notice
Most states and jurisdictions mandate that you provide one or more types of notices to residents. These regulatory notices can include:
- Receipt of deposit
- Bank holding notice detailing the name and location of the bank holding the security deposit. (Tennessee even requires you to specify the account number.)
- Notice that the holding account earns interest or does NOT earn interest.
- A signed, separate statement of the condition of the apartment at move-in, including a comprehensive list of any existing damage.
- Inventory checklists, move-in inspections, right to a move-out inspection notice.
- Notice of intent to impose a claim on a security deposit (delivered by first class mail!)
Depending on the location of your property, you may be required to issue both state-mandated and locally-required notices. And many of these notices must be delivered within tightly specified timeframes to avoid security deposit fines.
8. Missing deposit return deadlines
Processing a refund by the required deadline is a complicated, time-consuming dance, and to avoid fines, it must also be highly synchronized. Properties must coordinate among multiple parties to complete move-out inspections, get repair quotes, gather receipts, calculate refunds and issue the refund in time. During peak moving season, you may be juggling ten move-ins and move-outs simultaneously. And if you miss the deadline by a day, get ready—security deposit compliance violations can cost up to three times the deposit amount, and you could be on the hook for attorney fees, too.
Reddit feeds are full of frustrated renters posting about late deposits and unclear damages. That’s often because the time between getting their refund back and having to pay a deposit at their new place causes financial strain. States that lean more renter-friendly typically require a deposit postmarked within 14 days of move-out, like Hawaii, New York, Washington, Nebraska, South Dakota, Arizona, and Alaska. Other states like Alabama and Arkansas give properties up to 60 days to return deposits.
9. Not handing over uncashed refunds to the state
If a former resident never cashes their refund check, you’re not in luck—it’s actually a major headache. Many residents don’t leave a forwarding address, which means you’re often mailing a check to the last address on file (your property), and the resident calls wondering where their check is.
If they don’t call or ever cash their check, the state can claim the money through escheatment. This means you must turn that money over to the state within a state-specified time period. Many states are increasing their unclaimed property enforcement efforts, and there can be hefty consequences if your business isn’t compliant. There’s also no statute of limitations on unclaimed property audits, so the state could still come knocking even if a resident moved out five years ago.
The costs and risk of security deposit management mistakes
With regulatory scrutiny rising and residents more review savvy than ever, staying on top of compliance is critical. More than 30 states impose steep penalties for mistakes that include up to three times the deposit and/or paying legal fees, with the most onerous allowing fines up to $25,000 per occurrence. For operators, not having a reliable process in place also means potential exposure to class action lawsuits. In 2020, a Georgia judge ruled in favor of a $2.4 million class-action settlement that accused a major management company of routinely withholding refunds that should have been issued at move-out.
How deposit automation can de-risk security deposit compliance
Security deposits are still the most effective way to protect your asset and allow residents to move out with as much deposit money as they moved in with. One way to reduce compliance risk and security deposit management mistakes is to implement a deposit automation platform. Deposit automation platforms are configured to meet jurisdictional requirements and integrate directly with your property management system. This streamlines existing processes and removes much of the manual work responsible for so many security deposit fines and fees.
Roost is a mission-driven tech company focused on improving property NOI and renter financial health. Roost’s free platform helps large multifamily automate the deposit intake and refund process, reduce compliance risk, and minimize disputes. It also helps renters avoid late fees and build credit history by providing renting guidance, financial tips and savings deals, and a simple way to turn their refundable deposits into an instant emergency fund.