One of the things a lot of landlords fail to realize or refuse to accept is that the security deposit belongs to the tenant. The landlord may be holding it, but it still belongs to the tenant. As a professional property manager and regulated by the state of Missouri, I’m required to hold the security deposit in a separate bank account. I suggest everyone do the same. That’s one of the reasons I require the tenant to pay their rent and deposit on separate checks at lease signing. This helps keep records straight. Our state has regulations regarding security deposits that help protect both the tenant and landlord. For example, you cannot charge the tenant for normal wear and tear. Normal wear and tear is very subjective and if challenged, you need to be prepared to defend your assessment. What I would suggest is to talk to other landlords that have been challenged in court and see what their experience has been. Another regulation addresses the use of security deposits for the last month’s rent. Unless the landlord agrees, the tenant may not use their security deposit as last months rent. If they try to, we consider the rent to be late and charge late fees. Doing so allows us to bill them for the late fee, show in our system that they did not pay the last month’s rent, and have an outstanding balance. You might say that it doesn’t matter, you probably won’t get the money anyway, but if the tenant ever uses you as a reference, you won’t be giving a very good reference. And, if you want, you could make a small claims case and have it on the tenant’s record. If another landlord does a background check, it’ll show up.
Again, it is critical you keep the security deposit separate. It is the tenant’s money that you are holding in escrow. We are so particular about protecting the tenant’s money that we have turned down clients that do not allow us to manage that money. I do not understand why any of my clients would object. It’s not their money, and why would they want to worry about compliance with state statue. Our state requires that the tenant be either refunded the security deposit or receive an explanation of any funds held back within 30 days of when the property was vacated. If this doesn’t happen, the tenant may sue for double the amount owed to them.
How much should the security deposit be? Missouri allows no more than twice the rent. If you were to look at our website you will see that we post a “minimum” security deposit. We may just charge the posted amount, or the tenant may have a problem with their background check and we will require more than posted. Most people expect the deposit to be equivalent to one months rent. We charge more. That’s our way of letting the tenant know that the deposit is not the last months rent. I don’t have evidence that it works, but it at least puts that seed in their head.
Here’s to keeping cash flow positive,
Dave
