Landlord’s Guide to Security Deposit Best Practices

The issue of security deposits tends to be one of the classic “he said – she said” battles included in the ongoing dynamic of tenant-landlord relationships.

From the tenants perspective no matter how much they have trashed the property they still expect their security deposit returned in full… with all of the accrued interest too boot.

The fact of the matter is that in any given situation it is hard to tell who has the most truthful story because the landlord fails to implement the necessary “best practices” to ensure the tenant acknowledges, in writing, the condition of property on the day they sign the lease and take possession.  And if these best practices are not implemented the consequences for landlords can be costly.

In most states there are specific laws regarding the receipt and repayment of a security deposit.  In Maryland for example, the security deposit can’t be more then value of two months rent.  The deposit must be kept in a separate account and interest, currently 3% per year, must be paid on the deposit.  Additionally, once the tenant moves out, the landlord has 45 days to determine the amount of the deposit that will be returned and communicate that to the tenant with any unused deposit funds.

The law from the tenants point of view is very receptive to tenants taking the landlord to court to challenge the amount of the returned deposits… and the tenant can request that 3 times the amount of the deposit can be repaid if the tenant wins the dispute in court.  OUCH!

As you can see, the financial penalties, not to mention the time and effort required to defend your position, are high for any landlord who doesn’t execute the deposit return process correctly.

Security Deposit: Lessons Learned

We learned this process the hard way — is there ever an easy way? — when we lost a security deposit dispute in court.  At least the tenant was not smart enough to have asked for 3 times the deposit amount.

In this situation we thought we had a solid best practice that included having the tenant complete their own inspection prior to move-in, while we completed our inspection when the tenant moved out.  This is a good process, but in this situation the tenant claimed that the single copy (there is a hint here) documents had been altered and the judge bought the story. In essence, the judge was telling my wife that she had forged a document.  That ride back to the office was not a pretty one!

Having paid the deposit back to the tenant and recovering from our wounds we set out to strengthen our system… and once implemented it never failed us again. 

Here are some of the highlights of that new and improved security deposit best practice.

1. On the day you sign the lease and hand the keys to the tenant, using your inspection report, have the tenant inspect the property for any items which they could get charged for against their security deposit.  These could be painted over ding on the wall, maybe a faint stain on a carpet, or even something that you as a landlord should have taken care prior to the tenant moving in.  Once the tenant completes that inspection then you should have them sign and date it. 
2. Now for the new and improved part… we always had the tenant do this move-in inspection… but what we didn’t do was have carboned (yes I know that is so OLD technology) copies of the document so that there could be no additions or deletions as we were accused of by the tenant discussed above.  Once the move-in inspection was signed by the tenant they got the original for their files and we kept the other two copies.
3. When the tenant moved out it was now our turn to perform the inspection.  Actually if you are doing your job as a landlord you will have conducted “safe and clean” inspections throughout the lease period — but that is a topic for another day.  The purpose of the move-out inspection is for you to capture the condition of the property on the day the tenant moves out.  This is were you want to capture everything that could become an deduction from the security deposit.  Once your inspection is complete we always let the tenant review what we had found and requested their signature.  Many times the tenants refused to sign our inspection report, and that was okay because we would just make a note in the signature block that the tenant declined to sign.  That never looks good in front of a judge.
4. Always, always, always, take pictures.  In today’s digital world there is no excuse not to take pictures.  It is hard to dispute a picture especially when supported by a move-in inspection signed by the tenant showing the property to be in good shape when they moved in, and your move-out inspection showing more then just wear and tear.  The camera is your friend… use it!
5. As you start your turn-over work getting ready for a new tenant, make certain that you capture all of the receipts for the work completed that will get charged against the tenants security deposit.  These receipts are worth their weight in gold when you are standing front of a judge.
6. Once you have your contractor estimates and/or invoices, now is the time to reconcile the security deposit account subtracting all the items that the tenant owed you such as unpaid rents or water bills, charges for damages or repairs you needed to make while the tenant lived in the property, and of course for the damages that you corrected once they vacated.  It is a simple math problem after that. Take the total security deposit collected (including any accrued interest) and subtract the above items.  If there is a positive balance write the check and send it to the tenant.  If there is a negative balance then you need to decide if you are going to chase the tenant to recover your losses.  I have my own opinions on that matter — but that is for another discussion.

Since we implemented our improved system we only found ourselves in court once for a security deposit issue, and once the judge saw the move-in and move-out documents we won the case easily.

If you have executed this best practice as described there is little chance that you will find yourself in front of a judge.  If you do find yourself in front of a judge, you can confidently go into court knowing that you are well prepared and will most likely win!

Best of luck!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.