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Security Deposit Final Accounting Tips – By Jim Straub

Posted on 01. Aug, 2014 by in all, Magazine Articles

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By now, I believe you know the basics:  a final accounting must be post-marked on or before [21] days after you receive possession of the property from your departing tenant and it must itemize the amount of the deposit you initially collected from your tenant, the amount and the reason you are withholding portions of the deposit and the amount the tenant owes you or the amount of the deposit you’re returning to the tenant.  [Some areas also require that you add interest to the security deposit you’ve held.]

Those basics can leave lots of room for interpretation and I’d like to offer you a few tips on final accounting.

Giving Too Much Information

I have seen some landlords err on the side of caution and give too much information in their final accountings.  How can that be?  This is one of the few times where offering more information than you’re required to give can actually create drama where there might not have been any.  I’m thinking specifically of the portion of the final accounting where you itemize what you’ve withheld.

State how much of the deposit you’ve held and why.  This means providing a clear itemization and an amount such as “window leaning – $45” or “damage to bathroom door – $75”.  This does not mean, “window cleaning, outside only – three hours at $15 per hour” or “damage to door – labor $45 per hour plus $35 supplies – sandpaper, spackle, mask, etc (receipts enclosed).”

Technically, both approaches are correct.  However, the second approach practically begs the tenant to call you to dispute that it took three full hours to clean the window or that your cleaning person shouldn’t have charged you $15 per hour when they’re only making minimum wage at their job or in the second case, that you could have bought the supplies considerably cheaper at a local hardware store than at Home Depot and that they shouldn’t be charged for a sanding mask because that’s just part of doing the work and the person making the repairs should have already had one.

The point is that you don’t owe the tenant this additional itemized information.  Now, generally speaking, most tenants know they are going to be charged for damages and cleaning when they leave that work behind to be done by you (or someone you hire).  So they’re not surprised when they get a bill for “cleaning” or “repair” at “x” charge.  When you provide them with receipts and a specific itemization though, it can really set some tenants off emotionally.  They usually don’t have the background in home repair and are surprised by how much these things actually cost when you break them down.  So, don’t give them any information that you’re not required to and that might confuse or anger them.  [Keep in mind that receipts need only be provided in California when an amount spent is $125 or more.]

When do you have to disclose these details?  Only when a court orders you to, generally when the tenant has filed a small claims court case against you.  Then, and only then, are you required to provide this information to the tenant.  Now, occasionally, I’ll get a final account dispute from a former tenant (which I always require that they put in writing to me, so that I can analyze their concerns line by line) and I have a decision to make.  There are times when providing more details to a former tenant who is disputing the final accounting may prevent them from filing against you in small claims court.  If I believe my tenant will see how carefully I’ve documented all of the work done and have receipts for each and every little thing, and then I know it’s possible they won’t risk the time, effort and cost associated with a small claims case.  In that case, there are times when I’ve provided a more specific breakdown.  I always take it on a case by case basis, though.

Good Documentation and Receipts

What makes a good final accounting breakdown and helps ensure you’ll win in any small claims court case?  Good documentation, a reliance on knowledgeable contractors and other professionals in the housing maintenance and repair field and receipts.

As long as you can demonstrate you have charged your tenants fairly, meaning the going professional rate for work and repairs done, you should be fine.  This means either hiring a professional to do the work or, if you do the work yourself, being sure that you don’t charge your tenant more than a professional would have charged you to do the work.  In other words, when you do a job, make sure you’re not just pulling a dollar figure to charge from out of the air.  If you’re ever called to defend your figures, you’re going to have to show where you got the dollar figure you charged the tenant.

This also applies to the hourly rate charged.  [If you do the work yourself, California small claims courts have accepted a rate of $20.00 per hour. The California Landlord’s Law Book states that you can justify this rate by saying that maintenance people get $8 to $10 per hour.  With benefits, this adds up to nearly $15 per hour.  It also says that supervisors who must schedule maintenance and inspect the unit (this could be you), are paid a higher hourly rate although they work on any one unit for a shorter period of time]. 

Use Licensed and Bonded Contractors

Your best ally when completing final accountings is a licensed and bonded contractor.  The most airtight situation for a landlord is when the contractor actually does the work for you and sends you an itemized invoice upon which you can rely for their professional opinion.  The invoice should list exactly what work was done, the amount of time the job took to do and the cost for time and materials.

You should also request that the contractor note if there is any damage done by the tenants that they were not able to repair or return to the condition it was when the tenants received the property and we also note what the depreciated value of the property is.

For instance, let’s take the door repair I mentioned above.  A tenant has punched a hole in the door and you’ve hired a contractor to patch it so the door is salvageable.  However, even with the patch, the door doesn’t look like it did before the hole was punched in it, therefore, isn’t worth as much.  In other words, it has a depreciated value.  How do you determine what that depreciated value is?  Your best bet is to ask the licensed professional.  Again, if you ever found yourself in court defending the amount that you have charged your tenant, a judge wants to see that you have relied on the expertise of a professional experienced in the area at hand and that you didn’t just pull a number out of the air.

Whether you do the work yourself or hire a contractor to do the work for you, I always recommend calling a professional to ask their opinion about depreciated value to the rental property.  (Most are happy to take the time to talk to you and will hope that you remember their expertise the next time you do need to hire a contractor.)  Then, it’s perfectly legal to charge your tenants both the cost of the repairs and a deduction for the depreciated value of the property.  After all, you paid for the repairs and even after the work is done, the door is still not worth what it was before.  The tenant owes for that and you should withhold it from the deposit.

As you can see, final accountings can be tricky and there are, as much as we sometimes don’t like to admit it, some grey areas.  I hope this information has clarified some of those areas.

Reprinted with permission of Rental Housing Journal Metro.