How to Handle Security Deposits

Security deposits can become a source of conflict between owners and residents. A good rule of thumb with security deposits is to remember that, unlike any other money that you receive from a household, the security deposit remains the resident's money, says Daniel Bancroft, a Boston-area attorney who specializes in subsidized housing and property management.

“The security deposit secures the resident's promise to keep the place in good condition, but the presumption is that the resident is entitled to get it back if he returns the unit in good condition, reasonable wear and tear accepted,” he explains. “If you think of the security deposit as the resident's money, you're more likely to properly consider the individual situations that come up—and if you are going to keep the resident's money, then you'd better have a good reason.”

We recently spoke with Bancroft about some of the common mistakes that site owners and managers make when dealing with security deposits. While he points out that much of the law regarding security deposits is state-specific, the following are good practices to follow no matter where your site is located.

Know When to Follow HUD Rules vs. State Law

Although HUD outlines its rules regarding security deposits [Handbook 4350.3, pars. 6-13 through 6-18], the provisions are sometimes inconsistent with state law. It's important to understand when to follow HUD regulations and in which instances state law prevails, Bancroft says. The Handbook specifies which regulations to follow for these security deposit procedures:

• Collection of the security deposit: Owners must comply with applicable state and local laws [par. 6-15f].

• Interest earned on the security deposit: Owners should follow whichever requirements provide the greatest benefit to the resident [par. 6-17a].

• Investment of security deposits and distribution of any interest earned thereon: Owners must comply with any state and local laws. If state law is silent, or if HUD regulations are more demanding, owners must comply with HUD's regulations [par. 6-17a].

• Refunding and use of the security deposit: Owners must follow state and local laws [par. 6-18b].

• Time frame for refunding the security deposit and/or providing resident with itemized list of damages: Owners must follow state and local laws [par. 6-18c].

“Depending on where your site is located, you might be dealing with the HUD procedure or you might be using a more restrictive and more specific state law,” Bancroft says. “In Massachusetts, we rely on the state law because it's much more rigorous.”

Practical Pointer: Owners often wonder whether they can charge residents a security deposit equal to one month of the resident's share of the rent or one month of the contract rent. In most cases, it is the Total Tenant Payment (TTP) as opposed to the contract rent, says Bancroft (see Fig. 6-6 in the Handbook). However, he adds that, with some programs in Massachusetts, such as the Section 8 Voucher program, the owner can collect a security deposit in the amount of the contract rent. Be sure to check your state law before charging more than the resident's share of the rent.

Check State Law Before Charging Additional Deposits

Many sites charge residents who keep cats or dogs in their units a refundable pet deposit in addition to the security deposit. While HUD regulations permit this additional deposit [Handbook 4350.3, par. 6-24], you may be violating your state law if the combined deposits (security and pet) total more than the maximum amount allowed by the state (for example, one month's rent).

“In Massachusetts, the security deposit law limits what you can collect at the commencement of a tenancy. You can collect only the first month's rent, last month's rent, a security deposit, and a key fee—nothing else,” Bancroft says. Therefore, he advises his clients who want to charge a pet deposit to make sure that the total amount of the security deposit and pet deposit is no more than one month's rent.

“It doesn't matter what you call it,” he explains. “If you collect money from a resident at the commencement of the tenancy, and it's not the first or last month's rent, if it uses the word ‘deposit,’ and appears to assure the owner that, in the case of damage caused he will have a fund to collect from, then it will be treated as a security deposit. Under such state laws, either consider the security to be the pet deposit or vice versa, but don't try to collect both.”

Return Deposit or Give Notice Promptly After Move-Out

HUD requires site owners and managers to refund the resident's security deposit within 30 days after the move-out date, unless the state or local law specifies a shorter time frame. For example, in some states the owner must return the security deposit within 14 days.

Knowing when and how to deduct money from a resident's security deposit appropriately can help you to avoid mistakes at your site that can prove costly in court and damage your site's reputation among your current and potential residents.

The HUD lease allows owners to make deductions from the resident's security deposit for:

• Unpaid rent;

• Charges for late rent payment and returned checks;

• Charges for unreturned keys; and

• Damage beyond normal wear and tear [Handbook 4350.3, app. 4a].

If you are keeping some or all of a security deposit, you must notify the ex-resident within 30 days (or the time frame that your state law requires) of the amount that you are keeping, and you must provide him with an itemized list, along with invoices to support the charges.

Keep Detailed Records of Unit's Condition

What is normal wear and tear in a unit? The definition is often disputed when an owner claims damages from an ex-resident's security deposit. The most typical challenges from ex-residents are: “It wasn't like that when I moved out,” “It was like that when I moved in,” or “It's normal wear and tear.”

To prove your claim, you must be able to show what the unit was like at the beginning of the tenancy, says Bancroft. HUD requires a Move-in/Move-out Inspection Report, which must be signed by both the owner and resident [Handbook 4350.3, app. 5], but also be sure to include annual inspection reports that show the unit's condition each year throughout the tenancy, any photos or videos taken of the unit, as well as a summary of conditions after the resident moved out.

Insider Source

Daniel Bancroft, Esq.: Broderick, Bancroft & Goldberg; (617) 641-9900; DAB@broderickbancroft.com.

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