Security Deposits or Move-in Fees
Deposits and fees are required by a landlord to protect his business against possible financial losses from tenant unpaid rents and property damages beyond normal wear and tear. The type, use, and amount of rental deposits and fees are customarily regulated by state landlord-tenant statutes. Additionally, local ordinances, area rental market conditions, property location and characteristics, and the landlord’s ability to absorb risk can affect the landlord’s deposit and fee requirements.
Most landlords utilize the security deposit as a primary risk management tool to protect their investment. The administration of security deposits for legal compliances requires the landlord’s due diligence on state statures for the collection, handling, and return of security deposit funds. In some markets local municipalities may also regulate the administration of tenant security deposits. For landlords with multiple properties, multi-family housing, and/or frequent tenant turnovers, administration of security deposit accounts can be time consuming.
As an alternative risk management measure, in some rental markets, primarily metropolitan areas, some landlords have utilized a policy of collecting a tenant move-in fee instead of a security deposit. A move-in fee is a non-refundable fee generally characterized as a fee collected from the tenant for turnover costs associated with preparing a rental unit for a new tenant. Unit preparation costs may include general cleaning and painting. Collecting a move-in fee may provide a benefit to the landlord in time savings for administrative costs of deposits while tenants may benefit from not having to come up with a large security deposit amount at lease signing.
While due diligence is required to determine whether a move-in fee is addressed by state statute and local ordinance as applicable to the rental property location, in general, a move-in fee is not regulated in many states. This is perhaps the most obvious difference between a security deposit and a move-in fee. Security deposits are regulated by state statutes and landlords are held accountable to specific duties and obligations. For the most part, move-in fees are not regulated by statutes and landlords are not held accountable for the use of move-in funds.
Security Deposits
All states allow a landlord to collect a security deposit when the tenant moves in and to hold the deposit until the tenant moves out. Security deposits are funds that legally belong to the tenant and remain a credit of the tenant during the tenancy. A landlord is legally accountable to the tenant for use of the security deposit funds.
State landlord-tenant statutes regulate security deposit limits, deadlines for itemization and return of security deposits, and disclosure requirements. The statutes provide clear protections to tenants for the use of their security deposit funds and the return of deposits upon tenant move-out.
Deposit disclosure requirements must usually be in writing. Common disclosures require the landlord to disclose the conditions under which part or all of the security deposit may be withheld and how the deposit is refundable. A landlord may be required to provide a written list of preexisting damage to the rental unit, a copy of inspection orders for the unit or a list of habitability defects before collecting a security deposit. In most states landlords that require a security deposit must utilize a move-in/move-out property inspection checklist to document the condition of the rental unit at time of tenant move in and upon tenant move out.
In states that require a separate account for holding a security deposit, a landlord is required to disclose the account number, amount on deposit, interest rate, and name and address of the financial institution.
The purpose of a security deposit is to protect the landlord from damage caused by a tenant. Specifically a landlord may only recover funds from a tenant’s security deposit if the tenant has defaulted on his obligation to pay rent (tenant owes past due rents) and/or the tenant has caused physical damage to the property that is beyond normal wear and tear allowed by statute.
Move-in Fees
A landlord may choose to collect a move-in fee for necessary services to prepare the rental unit for a new tenant. A move-in fee is a specified dollar amount that is not refundable to the tenant. The rental prospect/applicant/tenant should clearly understand that the move-in fee is non-refundable. A move-in fee is money that is paid directly to the landlord and is immediately available to the landlord to administer the funds as the landlord chooses.
When filling a vacancy, a landlord may collect an application fee and/or screening fee from the applicant. The applicant upon selection for tenancy will be required to pay the first month’s rent, possibly the last month’s rent, security deposit, and/or other fees or deposits, such as pet fees, parking, or use of other amenities. For many tenants, the total dollar amount of move in costs can be quite high. There is a potential risk that the new tenant will over-extend his financial abilities to pay or under-estimate his ongoing costs of living including rent and utilities. The tenant may be able to pay his deposits but fall short when the next rent payment is due. Adequate tenant screening by the landlord and clear communication of rent policies to the new tenant may help to minimize potential risks. A move-in fee in lieu of a security deposit can often provide some relief to the new tenant for his signing costs while allowing the landlord to collect a set fee upfront to potentially offset a future expense caused by a tenant default.
Move-in fees may be assessed as a flat fee, for example, based upon the size of the rental unit, or as a calculated percentage of the monthly rental amount. A landlord may take into consideration the costs of a typical tenant turnover and set a move-in fee based upon that cost (within reason). Move-in fees that are less than a customary security deposit amount are usually more attractive to rental prospects and more easily budgeted by incoming tenants. A range of 1/3 to 1/2 of the monthly rental amount may be less a burden to the tenant than a one to two months’ rent amount collected as a security deposit.
If agreed to by mutual consent of landlord and tenant in a written document and as allowed by statute, a landlord could collect a security deposit and a move-in fee from the tenant. An amount designated as the security deposit could be held for the tenant during his tenancy and refunded per the tenant meeting terms and conditions of his lease. The amount designated as a move-in fee would not be refundable, being immediately converted to landlord use. Care should be taken that total deposits and fee amounts comply with applicable statutes and ordinances.
Key Differences
The key differences between move-in fees and security deposits:
- Security deposits by statute are refundable to tenants. Move-in fees are non-refundable.
- Security deposits are typically an amount ranging from one to two months’ rent. Move-in fees are typically one-half the monthly rent amount.
- Security deposits are regulated by state statutes with specific landlord obligations and requirements. Move-in fees are generally not regulated.
Considerations
Whether a security deposit or another form of security should be used to protect a landlord’s business will depend upon several factors including legal compliances, prevailing rental market conditions, property location, property brand, and the rental policies and practices of the landlord.
As a landlord best practice a traditional rental policy of collecting a security deposit in the amount as allowed by statute may help protect the rental investment to a greater degree. The tenant has an obligation to take good care of the rental unit and pay rent as agreed in the lease contract. The tenant has a vested interest to uphold that obligation. The tenant is protected by statute in his right to a refund of that deposit upon his meeting the terms and condition of his lease. The landlord has the right to deduct his financial losses if the tenant defaults.
Formulation of rental policies and practices must be done with complete understanding of applicable business regulations, landlord-tenant statutes, local ordinances, and financial safeguards.