There seems to be this idea out there that security deposits are unlikely to be refunded. Many landlords and tenants either have the “I’m going to keep it” or “I’m going to lose it” mentality. That seems like the wrong way to go about the business. Landlords should be more than happy to refund tenant security deposits.
What Is A Security Deposit For?
Let’s think for a minute about what a security deposit is for. A security is a sum of money taken upfront as a sort of guarantee that at the end of a lease your property will be returned to you in much the same condition as it was rented, less normal wear and tear. You take the deposit to try to ensure that the tenant will refrain from causing damage to your property.
For the above to work however I think that the tenant has to have a reasonable expectation of getting their security deposit back when they move. If everyone “knows” that the security deposit is going to be kept by the landlord, what incentive does the tenant have to not cause damage to your property?
A Better Business Model
A lot of this landlording business is about dealing with people. And a lot of dealing with people is about setting up expectations on the front end. Much like teachers on the first day of class who lay out what is expected of their students; landlords have to do the same with their tenants. If you want your property returned to you in decent condition, you have to set that expectation on the front end.
We set that expectation by explaining to new tenants that we want to and do refund the majority of the security deposits we collect. This is done during the lease signing process. First, we give them the expectation that they can get their security deposit refunded. Next, we explain the difference between normal wear and tear and tenant damages. Finally, we list the charges we will apply to their security deposit for various damages they may cause.
So right upfront we have set the expectation that they can get their money back if they return our property to us in good condition. We reinforce this expectation on the back end as well by resending all of this information to them when they inform us of their plans to move.
Most of the time, this process works very well. We often retake possession of our rental units with minimal repairs and cleanup necessary.
The Wrong Profit Center
Seeing tenant security deposits as another potential profit center, to me is a bad business decision. Doing so only creates the incentive for your tenants to cause damage and cost you money. Why should your tenant care about your property if you are just going to take their money? Thing is, they will not and will potentially create more damage than the security deposit will cover.
People respond to incentives; be sure to set yours up properly.
What is your view? Do you refund most of the security deposits you collect? Why or why not? Please share with your comments.
My tenants nearly always deserve their full security deposits back. Twice recently I got their houses back in better condition than I had given them. My turn-around was literally zero on both. I create a nice product, I care for my customers, and they generally respond in kind. If your clients are not getting their security deposits back perhaps it would be prudent to examine your initial screening processes.