What Should You Pay Attention to When Returning a Security Deposit?

1. Review your security deposit return rules

You should carefully check that your deposit (and deposit return) guidelines comply with your state's rules on deposit return period and procedures. The laws vary from state to state, but the key points mentioned here can help landlords avoid conflicts over the deposit at the end of the tenancy in every state.

2. Be lenient with minor abrasions

Despite your tenant’s best effort, sometimes they will inevitably leave minor scuffs or dents in your property for which they should not be held responsible. Most minor damages can be repaired fairly easily. The best use of your time is to restore the apartment to a reasonable state and provide good service to the next tenant.

3. Explain how tenants can help you return the maximum deposit amount

Ideally, you have kept a record of the conditions of your rental property before your tenant moved in and can use that record as the benchmark for move-out comparison purposes. You should also make sure to tell your tenants that your preference is to give back their deposit—always refer to it as their money—and let your tenants know how they can help you do that. You want long-term tenants to be careful, but not paranoid. If tenants know they have a real chance of getting their money back, you will also stand a better chance of getting your unit back in good condition. You can even offer to give a form reference letter to great tenants who carefully maintained your property and returned it in ideal condition.

4. Do not be pennywise and pound foolish

You can choose to keep the security deposit in different accounts or use all of them up front, but you may have to pay a lot more to defend your tenant's claim if you cannot return the security deposit your tenant is entitled to. Keep in mind that your tenant may ask for a full refund of the deposit if the property is in good condition. Tenants usually need every cent of the deposit to move into their next rental property, and their demands can be fierce. In fact, you can spend hours (the equivalent of a few hundred dollars for most people) explaining the reason for the deductions to tenants and showing them photos before and after the tenancy.

Because security deposit concerns money, tenants will usually familiarize themselves with the deposit rules (which are widely available online). Even tenants who are not legal experts can represent themselves effectively in small claims court (again, information on rules and procedures is readily available). Another advantage tenants often have is that many landlords don't strictly follow their state's deposit rules—often forgetting any State interest requirements, not placing the deposit in a separate account, or simply being a few days late with their payments.

If a dispute ends up in small claims court, you may have to admit you did not comply with the deposit laws (by which time you will likely wish you had just given the money back in full). In addition, you could end up paying thousands of dollars in penalties and legal fees (yours and maybe even your tenant’s). From a risk management perspective, it makes little sense to keep the deposit unless your tenant is absolutely responsible for the amount withheld.

5. Be precise in itemizing deductions

If you decide to exercise your legal rights to retain part of the deposit because a tenant damages the unit, just remember to calculate the exact amount. You may need to defend and justify the specific amounts in court, so you can’t just give ballpark figures for the repair costs. This advice applies even if it was the tenant who notified you of something broken and volunteered part of the deposit. You can imagine that if you overcharge for the repairs, your tenant may still be unhappy about being taken advantage of.

Once you withhold part of a deposit, you have entered a legal ground where every penny needs justification. Your own rough estimates on the repair cost or value (if you did the work yourself) won’t necessarily hold up. If you have work done by outside contractors, you will need an accurate bill for the replacement or repairs. A better approach is to do multiple evaluations. If you do your own work, it may be cleaner to just charge for the parts you purchase, unless you can prove that you used a reasonable labor rate.

It is a good idea to take photos of any repair-related receipts or invoices. You can store and categorize these photos in Tellus, sending them to your tenant upon moveout so that they know the exact amount to be deducted from their deposit. Then, send them the remainder of the deposit.

The more reasonable your fee and the more detailed your documentation, the less likely the tenant is to question your deductions. Tenants also value their time and would assess their odds before filing a case in small claims court.