Why Security Deposits In Chicago Are A NO NO!

Question

This isn't meant to be a long post but I have a lot of first time investors and house hackers or just investors that are new to Chicago that ask about charging a security deposit and my answer to them is NEVER charge a security deposit. Chicago is a city that heavily favors the tenants rights over the owner. If you even so as forget to give the tenant $1 back from their security deposit, they legally can sue you for up to 4 times the amount of the initial security deposit. What you will see instead in Chicago and what I always recommend my client's do is charge a move in fee. Even with a move in fee, if a tenant damages something, you still have the right to take them court in which you will more than likely win and they still would have to pay you for those damages or risk having a negative mark on their credit which would make it extremely difficult to be able to rent on their own again until it falls off the report. Most people will figure out a way to pay for the damages rather than having that hanging over their heads for 7 years until it's fallen off their credit. So in short, I strongly do not encourage taking security deposits because of such the high risk to the owner/landlord and just try to look more into the landlord/tenant laws in Chicago.

Joe Splitrock · Answer

If you follow the rules and only take legal deductions, you shouldn't have problems. I think some landlords make the mistake of taking deductions without proof, without receipts or they charge excessive amounts. They will charge tenants full cost to replace 10 year old carpet, when they should be charging nothing because the item is past its useful life. If you have everything documented through photos and receipts, that usually avoids court.

One other thing I learned is work with tenants if they dispute a charge. If someone argues about an amount, I will usually offer some small concession. I try to negotiate something that leaves feeling like they got something. Not only does this reduce the likelihood they challenge me in court, but it also ends the relationship on better terms. This is a business and you don't need people out there bad mouthing a landlord for gouging security deposits.

I try to return 100% if possible. My last move out, I found a little missed cleaning which took one hour. I could have charged them $25 but instead just returned the full amount and said thanks. In todays world of social media, it shocks me when a landlord nickels and dime tenants. A tenant lives in your place for years, pays rent on time and you want to get a couple hundred bucks from them when they move out? Before you know it, they are bad mouthing you on Facebook or leaving bad reviews for you. All over some small amount of money. Business reputation has a cost too.

John Warren · Answer

@Daniel Nevarez and @Frankie B. Cook County just passed their own land lord tenant ordinance which changes the game quite a bit for security deposits. It isn't identical with Chicago, so there may still be room for some owners to do security deposits. For me personally, I am going to move to either move in fees or surety bonds depending on my attorney's recommendation. I don't love move in fees, but at least I get to keep them with no drama! I just like security deposits since they properly incentivize the tenant to clean and prepare the unit when they are done living there.

Brie Schmidt · Answer

I collect security deposits.  I don't think it is a big deal.  My leases all expire May 31.  Anyone with a SD I just quickpay them $1 along with their SD ledger and include that with the lease renewal.  Takes a few minutes.  Nothing to cry over

Nathan Gesner · Answer

I hear tenants complain about gouging all the time, so it's no wonder many of them are hesitant. I've seen private Landlords keep an entire deposit when the cleaning was probably no more than a couple hours. It happened to me when I was younger. Many Landlords just keep it all, knowing the Tenant won't fight back.

If it's less than a couple hours of cleaning, I usually just eat the cost. Over 80% of my renters get a full refund and a good Landlord reference when they move out. I heavily document everything with pictures and typically won't charge for something unless it's blatantly obvious or I can prove my case with documentation. If the tenant pushes back and I can't prove they were responsible, then I'll usually let it go or negotiate a lower charge.

If we use the entire deposit still have a couple hundred uncollected, I usually send the tenant notice and demand payment, but then I don't pursue it further. It's not worth the effort when I know only a very small percent will ever pay anything.

Jay Hinrichs · Answer

some of my clients in MS  years ago got away from this and simply charged a 500 or 1000 dollar non refundable move in fee.

so at the end of the lease there was not this big debate about the security deposit.. tenant new they had nothing coming back and landlord mitigated whatever turn over costs with the on refundable move in fee..  Still does not keep folks from trashing units there though.. I mean its just how many of them live everyone's idea of neat and tidy is vastly different.

Dave Spooner · Answer

As a landlord, I'd hate to nickel and dime a tenant that's been there for years. I think charging a moving fee is fine. Overall I can see how in the next coming years more protection for tenants. As a landlord make sure you are more creative in your approach and keep reciepts.

Dan Schwartz · Answer

So let me get this straight, rather than deduct repairs from a security deposit, write on a piece of paper what the deductions were, do some simple subtraction, pay 0.01% interest on the deposit held, and settle this all within 45 days (we have 14 in AZ!), you guys would rather go through the time and expensive of suing (or threatening to sue) every tenant that moves out of one of your properties.

Boy, you guys are really “sticking it to the man,” aren’t you?

Tom Shallcross · Answer

@Tony Freeman - all valid points. I don't necessarily agree with a Chicago housing provider going to court and most likely winning for damages part, but do agree that you're exposing yourself to a lot of potential risk with security deposits in the city. On the flip side, if you know the rules it's not super complex and can be done rather easily once you know the playing rules. It also helps gauge your tenant if they don't blink an eye when you ask for a deposit.

Below are the requirements from the city's website. Also, note that on the lease you must state the physical branch that the deposit is being held.

"Chapter 5-12 of the Chicago Municipal Code hereby gives notice that the rate of interest on security deposits under rental agreements from Jan. 1, 2021 through Dec. 31, 2021, shall be:

0.01%

This rate is based upon the average of the rates of interest, as of Dec. 31, 2020, of the following types of accounts at Chase Bank, which is the commercial bank having the most branches located in the City of Chicago: Savings Account 0.01 percent; and Six-month Certificate of Deposit (based on a deposit of $1,000) 0.01 percent.

• -A landlord must give a tenant a receipt for a security deposit that includes the owner's name, the date it was received and a description of the dwelling unit.
• 
• -The receipt must be signed by the person accepting the security deposit. A landlord must pay interest each year on security deposits and prepaid rent held more than six months.
• 
• -The rate of interest that a landlord must pay is set each year by the City Comptroller. Before a landlord can deduct expenses for damages from the security deposit, the landlord must provide the tenant with an itemized statement of the damages within 30 days of the date the tenant vacates the dwelling unit.
• 
• -Within 45 days of the date the tenant vacates the dwelling unit, a landlord must return all security deposit and required interest, if any, minus unpaid rent and expenses for damages. In the event of fire, a landlord must return all security deposit and required interest, if any, minus unpaid rent and expenses for damages.
• 
• -During December of each year, the city comptroller shall review the status of banks within the city and interest rates on savings accounts, insured money market accounts and six (6) month certificates of deposit at commercial banks located within the city.  On the first business day of each year, the city comptroller shall announce the rates of interest, as of the last business day of the prior month, on savings accounts, insured money market accounts and six (6) month certificates of deposit at the commercial bank having the most number of branches located within the city.  The rates for money market accounts and for certificates of deposit shall be based on the minimum deposits for such investments.  The comptroller shall calculate and announce the average of the three rates.  The average of these rates so announced by the comptroller shall be the rate of interest on security deposits under rental agreements governed by this chapter and made or renewed after the most recent announcement."

Daniel Nevarez · Answer

@John Warren @Brie Schmidt @Tom Shallcross Thanks you and thank everyone else for the info!!

Tom Shallcross · Answer

@Frankie B. - below is the summary of security deposit requirements from recent Cook County RTLO that @John Warren referenced (applies to all of Cook except Chicago, Mount Prospect and Evanston). Copied and pasted from the site as not sure if I'm allowed to link to it:

"A landlord may charge a security deposit, but must:

- Charge no more than 1.5 times monthly rent for security deposit

-Give a receipt for a security deposit that provides the owner’s name, the date it was received and a description of the dwelling unit. It must be signed by the person accepting the security deposit, unless the tenant pays the security deposit by electronic funds transfer, then landlord may give an electronic receipt

-Hold all security deposits in a federally insured account in an Illinois financial institution separate from the landlord’s other accounts

-Tell the tenant in writing the name of the financial institution where the landlord will deposit the security deposit

-Inform the tenant of the new account if the landlord transfers the security deposit into a new account

-Return the security deposit within 30 days after the tenant moves out

-Only keep money from the security deposit if the tenant owes rent or court fees, if the landlord has gone to court (but not attorney’s fees) or for reasonable costs that the landlord has paid for the repair of the unit (but not costs for “ordinary wear and tear”)

-Provide a detailed explanation of the costs within 30 days if the landlord has kept money from the security deposit for repair

-Be responsible to return the security deposit if the landlord sells the property until the first landlord gives the money to the second landlord and gives the tenant written notice; then the second landlord is responsible for the security deposit

REMEDY: If the landlord charges too much for security deposit, does not return the security deposit, or does not give the tenant proof of the expenses for any repairs deducted from the security deposit, the tenant may sue the landlord and shall receive damages equal to 2 times the security deposit plus attorney’s fees. If the landlord makes a mistake with the paperwork on the security deposit, the tenant must first give the landlord a notice and wait 2 business days to see if the landlord corrects the paperwork. If the paperwork is not corrected, the tenant may sue the landlord. If the landlord does not give the proper receipt for the security deposit, the tenant is entitled to the immediate return of the security deposit."

Why Security Deposits In Chicago Are A NO NO!

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