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Security Deposit Policies: Dos and Don'ts

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Created on: Aug 26, 2009 6:47 PM by community-editor - Last Modified:  Feb 26, 2014 2:56 PM by community-editor
security deposits processing dos and don'ts
Security deposits fall into the gray area of vacation home renting policy. There are general rules of thumb that you should know, but some security deposit practices rely on individual discretion. If you follow these general recommendations you should be able to avoid most pitfalls.

DO consider your weekly rate when determining your security deposit amount. Charge $250 or 10% of the rental price, whichever is larger. Although you are free to charge whatever you like, this is standard practice.

DON'T forget to refund a renter's security deposit. Most states have laws that define exactly how many days you have to refund the deposit (typically from 14 to 45 days), but in every state it is illegal to keep the deposit without just cause.

DO check for deadlines and restrictions before choosing a security deposit payment method. Whatever your approach to security deposits, be it charge and refund or preauthorization, make sure you weigh the pros and cons of each. A disadvantage of charge and refund might be incurring two transaction fees (one for charging and one for refunding). With preauthorization there is a danger of time restrictions. Because there may be time limits on holding funds (usually around 30 days) you want to wait until about 7 days prior to check-in to pre-authorize the security deposit. This will give you ample time after the guests depart to process any necessary charges. Check out this article for more details on accepting deposits via credit card.

DON'T use security deposits as a way to nickel and dime your renters out of more cash. Accept that normal wear and tear should be attributed to the cost of doing business. For example; items such as dishes and glasses are prone to breakage and should be replaced without charging your renters unless the damage is excessive.

DO include specific violations in your rental agreement that would result in partial or full loss of a security deposit. Although it's hard to think of everything, be as comprehensive as possible so your renters have an idea of what is considered a violation.

DON'T keep a security deposit out of spite or because you think you've been inconvenienced. If you don't have a receipt for a replacement item or a repair, you shouldn't charge them for it. Simple as that!

DO process security deposits right away, either by charging the credit card or cashing the check. If there is a problem, give your renters the benefit of the doubt, and have them confirm their information or ask them for a different card. If round two is unsuccessful, then it might be a sign that you shouldn't allow them to rent.

DON'T return a security deposit before you or your housekeeper has inspected your property. You have no recourse once you refund.

DO develop close relationships with your housekeepers. They are your eyes and ears, and the responsibility of reporting renter-induced damage often falls to them.

DON'T forget to make a visual record of the damage. Try keeping a digital camera handy for your housekeeper. If damage does occur, this is an easy way to capture it before you repair or replace it.

DO minimize fallout with subsequent guests if you aren't able to fix damages that occurred before they arrive. Send them out to dinner on you. Compensate them for whatever inconveniences they might experience. Be sure to keep all your receipts because these associated costs should come out of the previous guests' security deposit. Note: This must be specifically written and signed in your rental rules, so be sure to amend your rental agreement accordingly.

DON'T assume you have no recourse if renters cause more damage than their security deposit covers. Consider the following three options. 
  • Option 1: Absorb the cost (if it's a nominal amount of $50 or less).
  • Option 2: Attempt to recover the money by speaking with the renter directly. This tends to work well with renters who report the damage themselves.
  • Option 3: Take legal action if the renter refuses to pay. Depending on the state(s) in which you and the problem renter reside, you may be able to take them to small claims court. However, it would probably be wise to consult an attorney before taking action.
DO consider using preauthorization if you are concerned your security deposit will be a barrier to short-stay renters. This way, renters are only charged if there is damage. Otherwise, the account is never charged. You should include this in detail in your rental rules and your listing. It might be just the thing to win over those cash-strapped, yet conscientious renters.

DON'T fail to familiarize yourself with state laws governing the maximum length of time you can withhold a deposit. Some states even require security deposits to be held in a separate, interest-bearing escrow account.

DO give your guests approximately three to five business days to pay your security deposit after they receive your rental agreement if they are paying by check. If they use a credit card 24-48 hours should be sufficient.

DON'T forget to be a “defensive homeowner.” With luck, you will never have to contend with most of these situations, but you should craft your rental agreement as though they will unequivocally happen to you. This will force you to create fair policies when you are level-headed (rather than after damage occurs). And because renters will have agreed to your policies ahead of time, you’ll be saved time and trouble in the end.

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