Why Have Some Landlords Stopped Collecting Security Deposits?

It is generally a common practice for landlords to collect a security deposit at the start of a lease in case there is damage to the property or unpaid rent. Collecting a security deposit seems like a no-brainer for most landlords. It is a safety net against tenants that fail to follow through with their responsibilities and a motivator for tenants to take care of the rental property. However, in many cases security deposit laws and regulations have become so burdensome that more and more landlords are opting not to collect them and here is why.

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  • Laws Are Oppressive to landlords: In many states, laws around security deposits are very burdensome to landlords and outweigh the potential benefit of collecting them. For instance, in Seattle a landlord has 21 days to return the deposit or give a written statement that includes the amount of money withheld from the security deposit and why it was withheld. If the tenant takes the landlord to court because they did not receive the security deposit withholding statement, the landlord may have to pay 2x the deposit back to the tenant. In other cities like Chicago, security deposits need to keep in separate bank accounts and interest has to be paid to the tenants within 30 days of the 12-month term.

  • It is very risky to hold some or all of a security deposit: In many states, if a tenant is able to prove a landlord acted in bad faith when they did not return all or some of the security deposit they may be forced to pay 2x as much as the deposit plus attorney fees. One can imagine, even in a case of itemized deductions, a tenant may be able to argue that the costs that the landlord listed should have been cheaper. Therefore, the time and money on the part of the landlord to prove that holding back part or all of the security deposit was legitimate often is not worth the security deposit.

  • Tenants use it as an excuse not to pay last month rent: Since security deposits are often one month’s rent, many tenants will simply tell or expect the landlord to consider the security deposit as last month’s rent. While this violates the lease, unless the landlord is willing to take the tenant to court to collect the last month’s rent, only to give them the security deposit, this practice makes collecting a security deposit in the first place pointless.

  • Burdensome to tenants: Many landlords are not collecting security deposits because they are too burdensome to tenants. For many tenants paying first month’s rent, a security deposit and the cost of moving can be very difficult the manage. While many landlords may say if a tenant cannot come up with that money then I don't want them as a tenant, some landlords may realize they may miss out on a large segment of people including people who may be moving from another state for a new job that may not have as much disposable income or retirees with fixed incomes.

Landlords who don't collect security deposits may instead utilize other forms of payments that protect them and their property but do not come with the same legal pitfalls. For instance, some landlords may collect first and last month rent when tenants move in to protect them against a tenant skipping out on last months rent. Other landlords may collect a move in fee which the landlord keep, usually half of the rent, which would cover the cost of minor damages over the life of the lease.

This post is provided by RISSOFT Residential and Commercial Property Management Software, specializing in innovative and cutting-edge property management software for all 50 states. Request a demo or contact us today to receive more information.

Disclaimer: The information provided in this post not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.