And a serious sit down talk with these people.Either way, mitigate your damage and use this as a learning lesson for the next tenant.

Plus this is a smal community and I don’t want to damage my reputation.

Optional things like slab leak coverage, earthquake, tenant damages, vacancy allowances and other things not normally covered if you feel it is worth it.

Light rehab,, demo , paint,  May need some water damage repair in bathroom. 

If you want lower your standards that’s your choice but be prepared for issues either with damage or non payment of rent and going through the process of eviction all while you’re collecting nothing and having to pay the expenses along with legal fees.

You are correct, they are wrong, deposits are for Damages or not cleaning normally, period.  

Only major surprise so far has been a leaking chimney and old termite damage.

As stated before, if it is leaking now, you're not fixing the leak, you're diverting it into the framing and causing way worse damage.

If they dont, or if it comes from a co-mingled account the tenant is able to get significant damages. 

WORST CASE IS I HAVE TO EVICT, FIX DAMAGES AND KEEP THE NON REFUNDABLE LEASE OPTION.