Despite what many believe, the purpose of a security deposit is NOT to ensure you get paid the final month’s rent. As a landlord, you should expect a rent payment on the first day of the last month of the lease, just like every other month. The actual purpose of a security deposit is to make sure that if your tenant vacates at the end of their lease, the apartment can be returned to ready condition for the next tenant with little or no expense to you. You should expect that after your tenant vacates, the apartment will be in pristine condition and you will be returning the entire security deposit to the tenant at their forwarding address supplied to you in writing upon their departure [see “How secure are your security deposits?”].
Unfortunately, the likelihood of you finding a pristine apartment on your move-out inspection is about as good as getting your rent on the first every month, including the last one. Nonetheless, you don’t want to limit your options at the end of the lease by making uninformed mistakes at the beginning.
As we’ve recommended in the past, collect an entire security deposit as a “security deposit” before your resident moves in. We have all heard the phrase “first, last, and security deposit.” This phrase, for most, means first month’s rent, last month’s rent, and security deposit, all of which will be expected from the applicant before they become a tenant. While the same dollars may come out of your applicant’s hand and into yours, exactly what you must do with them now and how you may be forced to handle them in the future is where things get tricky.
Let’s say you charge $1,000.00 per month for rent. “First, Last and Security” = $3,000.00. Right? You take the $3,000.00, put $1,000.00 into your security deposit interest-bearing account, and deposit the rest into your operating account and go on your merry way. Not so fast. Two major problems. First, the last month’s rent may be considered “security” anyway and so now you have mishandled a security deposit by placing in the wrong account. And, second, when your tenant vacates and you only account for the $1,000.00 in your escrow account, you may find yourself fighting with the tenant to get back an extra $1,000 and with the Banking Commission over improper security deposit accounting.
There is a simple fix. Collect two things before an applicant moves in:
The first month’s rent.
A security deposit (however much you want within the legal limits).
Don’t call the security deposit anything else. Don’t make reference to the last month’s rent. If the applicant asks whether you are collecting the last month’s rent, you can simply state, “This is a security deposit. We expect you to pay your last month’s rent just like all other months by the first of the month.” Take $1,000.00 and deposit it into your operating account. Spend it at will. Take the other $2,000.00 (or however much you collected) and deposit it into your security deposit interest-bearing account and prepare to return it in twelve months after your pristine move-out inspection. This will clear up a lot of confusion and avoid a few other problems that scenario one will invariably create for you.
Security deposit handling and accounting are governed by statute [again see “How secure are your security deposits?” for more on the subject]. Making things very clear as to what money you are collecting and for what purpose, at the beginning of your tenant relationship, will make your life much calmer and easier upon their departure.
Yet another way to protect yourself, and limit your losses at the end of a tenancy, is to not allow charges to accrue against the security deposit during the lease term. If your residents are responsible for maintenance charges, damage repairs, or other financial obligations incurred under the lease, apply those charges to your resident’s account and demand payment of those during the lease. Don’t allow them to accumulate over time with the intent that you will apply these charges against the security deposit. Doing so may very well leave you empty handed when that pristine move-out inspection turns out to be not-so-pristine. I was recently in court with tenant’s who believed the damage they caused to the unit would be immediately taken from the security deposit. That is a major no-no, even if the tenant suggests using it, for reasons already spelled out as well as potential legal problems associated with accessing a security deposit before the tenant vacates the premises.
If your resident offers or insists that you “take the charges out of my security,” you should consult a landlord attorney about your options as you have just witnessed the first symptom of what could turn out to be an expensive disease when that resident skips out on you two months before the end of the lease. See our past article “Your tenant skipped town – now what?” for more info.
Clarity and consistency will make collecting, handling, and effective use of security deposits a strong foundation for your unit turnover operations as well as your asset protection strategy.
Quick Tip:
Decline in under-35 home ownership means unauthorized occupants are coming.
We addressed the decline in home ownership for those under 35 years old last year based on data released by the U.S. Census Bureau reporting a 7.3{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} drop in homeownership by households headed by those under 35 years of age. This data, reflecting information compiled over the last eight years, shows a drop in ownership from 43.6{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} in the summer of 2004 to 36.3{b3839be935df112798d4ec5997aa1a27aa9a9725854b075bcbd0000f0c7f06fc} at the end of September 2012.
A recent U.S. News & World Report article cites two major reasons for this significant decline:
First, lenders have imposed strict lending requirements for mortgage financing, and under-35 households are experiencing a weak labor market that exacerbates their efforts to meet those requirements.
Second, some of these households had previously owned a home, but lost it to foreclosure and have either become renters or moved-in with family and ceased being a “household” entirely.
This decline in home ownership does not appear to be reversing any time soon, because the first point in the U.S. News & World Report article remains essentially the same today, and the second point is still a nagging concern. The Census data reinforces and further supports the commentary and conclusions provided in our December 2012 Quick Tip (“Increase in “shared households” raises risk of unauthorized occupancy”) that there may be an economic dimension to the increase in shared households. Indeed, this data on decreasing home ownership seems to establish that economic component.
As we previously outlined, an increase in shared households might ultimately lead to a rise in unauthorized occupancy, which – according to our clients – creates most of the systemic problems in their residential communities. The Census data regarding the decline in under-35 homeownership, and the lack of any indication that the trend is reversing sustains a sense of urgency to the subject.
We recommend that you pay close attention to reports of unauthorized occupancy, and vow to act to address them immediately. As we noted in our previous Quick Tip, unauthorized occupancy can negatively affect the residential community’s overall commitment to lease compliance, and may ultimately increase the wear and tear on the units. Recently, we are seeing more tenant-to-tenant and tenant-to-owner/manager conflict and issues caused by unauthorized occupancy. All of these things can undermine your financial assumptions and results for the residential community.
Meet with your landlord attorney to discuss unauthorized occupancy, and how the law and improved operational processes can help you address the subject to keep your communities stable and thriving.
Announcement:
Once again, LLF chosen as Platinum Sponsor for CTAA Tradeshow & Education Conference.
The Landlord Law Firm has once again been named the Platinum sponsor for this year’s CTAA Tradeshow & Education Conference to be held at:
Foxwoods Resort and Casino – Friday, November 7, 2014.
Those who have attended in the past know of the educational and networking value of the event and yes, this will be another year of fun and excitement at the LLF booth. Hopefully you’re are already “doing your homework” as instructed in our pre-show announcement. Didn’t receive the announcement? Don’t be caught off guard – click here to read it now!
FYI, it’s not too late to register. Just jump over to the CTAA website and complete the online registration form.
DON’T FORGET, although free, registration for Thursday night’s Pre-Show Party is once again required. Like last year, it will be a red carpet affair at Foxwood’s High Rollers Luxury Lanes that you don’t want to miss. Be sure to check that you will be attending when you complete your online registration.
Once again, it ought to be quite an event. Hope to see you at Foxwoods!
DISCLAIMER:
The reading of this newsletter does not form an attorney-client relationship. The contents of this newsletter are for informational purposes only and do not constitute legal advice. Nothing in this newsletter is intended to imply or predict the outcome of any legal matter that you may be considering or be involved in. The Landlord Law Firm makes no warranties of any kind regarding the information contained in this newsletter.