Let landlords hold security deposits, you’ll hate yourself later

10 Mar Let landlords hold security deposits, you’ll hate yourself later

If you do property management long enough, you’re going to come across a landlord that insists on you sending them the security deposits for them to hold in their own bank account. Only do this is you enjoy pain and heartache.

I went on a new property listing appointment early in my career and gave a great pitch. The landlord liked everything I had to say and decided to go ahead and sign the management agreement right there on the kitchen counter. As I’m going through the agreement paragraph by paragraph, I get to the section about security deposits. I explain that we will collect the deposit and hold it in our escrow account while the tenant lives in the home. At this, he insists that he will not agree to that and he must be the one to keep security deposits. Eager to sign up the property, I agreed to his demand and begin managing the property. I eventually did find a tenant, collected their deposit and sent it to the owner. All was fine until it was time for them to move out. That’s when I started kicking myself for backing down to the landlord’s demand.

Here’s the deal. DON’T GIVE SECURITY DEPOSITS TO LANDLORDS AS LONG AS YOU’RE MANAGING THE PROPERTY! Why? Because they spend them! PERIOD! I don’t care what they tell you about how they have a separate checking account solely for security deposit money. As soon as they have that check, they will proceed to use it. Maybe not at first, but as soon as something needs to be fixed. They justify it by thinking they will simply replace it or come up with it whenever the tenant moves. But hey, that’s not going to be for a while, right?

The reason this is such an issue is this. You (or someone in your company) showed the tenant the house. You approved their application. You prepared and signed their lease. You collected their security deposit. You collected their rent for 12, or 24, or 36 months. You were who they called with maintenance issues. You were who they saw during periodic inspections. You are all they know and most likely have never met the property owner. They don’t care that you sent the security deposit to the landlord after they gave it to you. As far as they’re concerned, you are who they will look to when it comes time to get their security deposit back.

So the scenario goes something like this. Tenant moves out. You do a move-out inspection and find that they left the home perfectly clean with absolutely no damage. They have a zero balance in their account and fully satisfied the lease term. Hey, they’re due a full refund of their security deposit! You call the landlord to inform them of the great news and ask that they mail a check to the tenants for their security deposit refund. The next day, the landlord calls you and says that they inspected the property themselves and they do not think the tenant should be getting any of their deposit back. They saw small nail holes in some of the walls and the carpet looked worn in areas. You proceed to tell them that those items are normal wear and tear therefore cannot be used to claim the security deposit. Landlord says tough, you work for them and they have determined that the tenant isn’t getting a dime back.

You know why they don’t want to give the deposit back? BECAUSE THEY DON’T HAVE IT! Guess what happens next. The tenant sues your company – not the landlord – but your company. Even if you properly disclosed who was holding the security deposit up front and feel you have a defense, you’re still getting pulled into a needless lawsuit that you now have to defend. Oh, and don’t forget the gleaming Yelp and Google Reviews the tenant is going to write about you. And my personal favorite, the BBB complaint that you now have to stop what you’re doing to respond to.

Do yourself a big favor and stand your ground. Either you hold the deposit, or the owner can find another property manager.

Share any horror stories you have about landlords holding security deposits by commenting below.

Ben Parham

Founder at Property Management Training Headquarters

Ben Parham is the Founder of Property Management Training Headquarters as well as the President and Managing Real Estate Broker of Integrity Realty & Management, Inc., a cutting edge real estate sales and property management brokerage operating throughout the Greater Denver Area. Ben served as the 2018 President of the Denver Chapter of the National Association of Residential Property Managers (NARPM) and currently serves NARPM National as a Southwest RVP Ambassador. Ben is a U.S. Navy veteran where he was a Cryptologic Technician (Technical) and was awarded the Joint Service Achievement Medal, two Navy Achievement Medals, and a Good Conduct Medal. He has a Bachelor of Science in Business Administration and is licensed as a real estate broker in both Colorado and Florida.