Security Deposits: Is there another solution?

Question

All:

Does anyone out there have a unique or a creative solution for dealing with security deposits?

As a landlord of many college student rentals, I spend an inordinate amount of time every year on this (seemingly) small issue.  It just seems to be such a huge point of contention with almost all of my tenants, that it may not even be worth the hassle. Between going over deductions, reconciling, mailing multiple checks for the multiple roommates, being threatened with lawsuits, and tenants who go ballistic over a cleaning charge. I do all the right things for my rentals. Provide clear expectations verbally and in the lease, take pictures of before/after, send move-out instructions with a checklist, provide itemized receipts for deductions, but it's still a massive headache.

I have a friend who owns a 150 unit MF and he doesn't charge a security deposit for his units which rent for $500.  He does an administration fee of $300, which is non refundable.  Does anybody else do that? I don't really want to do it, but have even thought about just giving back the entire deposit to all of my tenants as long as the place is not destroyed. I also hate to leave on bad terms, but it seems to always work that way if I deduct just about anything.

Is there another way to deal with this? Does anybody else do a non-refundable fee instead of a security deposit?

Evan Thomas · Answer

There was a BP podcast (episode 140 w/ Bill Syrios) where he talks a little bit about his student housing rentals. One of the thing he mentions that I heard in a few other podcasts was the idea of having a contact person in your rentals so you don't have to split everything between all of the different roommates. That single contact person relays all messages from the roommates to you, and all of your messages to his/her roommates. They would also be responsible for the rent and security deposit and splitting out one check you send to him/her for their roommates.

This might ease your pain a little bit in the process, streamlining some of the work.

Account Closed · Answer

A security deposit is not given to anyone until the rental unit is completely vacated by all.

A security deposit is to protect against damages upon move out.  Since only one person is planning to move, the rental has not been vacated, but still has occupants.

Therefore, if one of the tenants decides to move and wants their security deposit back, it is up to the others that are left to hash it out with the tenant that is leaving.

Of course, they won't want to give this guy or gal his or her security deposit back, so the tenant that is leaving will have to wait until all the occupants have left the unit.

You may say, well I'll do a walk through when a tenant moves out and if there are no damages or money owed at that time, I will give this person back their Security Deposit.  That would be fine and dandy if there were no damages or money owed. No problem.

However, there is always some damages done when a tenant moves out.  Try proving that this person who is leaving did the damages.  You can't do it.  It's impossible.  He or she will deny it and then it becomes a "He said She said" scenario...no evidence.

So the Security Deposits are returned when the place is empty and then if there are damages and money owed, it is deducted from the Security Deposit at that time.  It is at that time that  you will write a check for the balance owed to them, if any.

Nancy Neville

Will Gaston · Answer

Account Closed I hear you on that. I'm not doing anything unethical or illegal.  I just want to find a way around the administration "time suck" that it's become.

Jeff B. · Answer

Co-habitation is the problem.  Move-out at different times and there's issues.

Change lease:

• The security deposit is held until the unit is totally vacant and the keys are surrendered.  After a move-out walk-thru, deducting damages, the residual (if any) can be returned to ANY of the then resident tenants and the leasee is held harmless by all others.

Anthony Wienke · Answer

Makes me nervous thinking about just applying a non refundable service fee when they first move in. Sure you made an extra $200-300 when they move in but once the time comes for them to move out there is no incentive to clean the place once they go.

I might suggest this fee if you really investigate the tenants past rental history and back ground well. If they are high quality tenants after the check I would suggest this. Otherwise, id say stick with the refundable deposit and explain and rationalize every possible loop hole the tenant might find and argue with you about.

Off topic, did you know land lords and apartment owners are one of the most sued individuals in the country?lol Usually involves the security deposit and/or some injury they may have had while living in the rental.

Will Gaston · Answer

@Scott Trench I get where you're coming from on this.  I think I would come at it the same way you did if I read the post.

However, there are a ton of moving parts when renting to students. I have a tenant meeting with them for 90 minutes before they even sign the lease to go over my expectations and to train them on the way I do things. I've developed a pretty strong lease after 10 years and 500+ student tenants, but they forget a lot (i.e. everything) in between then and when they move out a year later. Also, I have many properties where I rent to a group of 5 or 6, which means 15 or 18 people (if you include parents) wanting to express an opinion on any deductions on the deposit. And that's just for one property.

It is virtually impossible to communicate effectively with 5 or 6 quasi-adults who will then relay that information, mostly inaccurately, to their parents.  I don't really have any issues with turnovers times because of the student cycle.  I'm just looking for something simple to do that will eliminate this every year. My assistant spends probably 50% of his time dealing with deposits during our summer months, which only represents 2-4%% of the gross income for the whole year.

It's probably just part of the job, but I always am looking for a better way to do things.

Scott Trench · Answer

It sounds to me like the issue may be with you, and how you educate and train the tenants on this process. If it's a problem that occurs once or twice with some individuals, it may be on them, but if it repeatedly comes up in your business, it is likely to be a failure on your part to solve the problem. (We all have these issues in business, so please don't take that negatively, you are crushing it simply by having enough rentals to have this problem at scale in the first place!)

My suggestion would be to make expectations very clear with each tenant - make sure that the tenants know that they are ALL responsible for the security deposit, that no one receives the deposit until everyone has vacated. Make sure that you have a clear property walkthrough at move in, and if the problem is persistent, at move out. Make sure to take pictures of all the damages, and to itemize the list of repairs if you aren't going to refund the deposit, and make sure that you can point to the lease, stating that you aren't giving the deposit back until every tenant on the lease has vacated or until a new lease supercedes it. You'll probably want to tighten up your lease by talking to an attorney.

Furthermore, I'm going to assume that a lot of these problems are coming from college kids that may or may not be very good with money and with behaving responsibly. I bet that these kids are often getting help from their parents. When that happens, any problems getting the security deposit will go through a filter (the student) before getting to the ears of the real financial decision-makers, the parents. So, you might be very clear with a student, and they might be telling half-truths to their parents, who then perceive you as the unreasonable one.

It might be wise to have a direct line of communication with parents, parents that are on the lease right by their college students (you can do this by only accepting candidates with excellent credit scores and proven incomes at least 3x the monthly rent, which will likely not be college students). With them on the lease, you can communicate directly with them, cutting out the student's filters in the process. This may save you a lot of headache.

Those are some of the reactions I have. I think that not requiring a security deposit or getting "creative" might leave you with a much higher probability of finding a mess on your hands when the tenants vacate, increasing turnover time...

Rick S. · Answer

@Will Gaston check out this forum as it may have some ideas for you:

https://www.biggerpockets.com/forums/52/topics/126...

Chicago has really strict security deposit rules so some people are changing to non-refundable move-in fees like your friend.  There are some other ideas on the forum that you could use also even though I know you aren't in Chicago.

Will Gaston · Answer

Jeff B. I like that suggestion.  A lot.

Lynn McGeein · Answer

I've looked into this before as many large apartment complexes have the $99 deposit or no deposit specials, and apparently there is a product where if you have enough units, you can buy insurance for x amount per year that covers you if someone does destroy a unit, so you can offer your tenants a much smaller security deposit but you are still covered as they've collectively paid your yearly premium for the insurance product to cover you.  I wish they could somehow scale that for smaller landlords like me.  But I couldn't find anything like it on a small scale.  Could be a great business opportunity for someone smart to figure out how to offer it for us little guys.

Security Deposits: Is there another solution?

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