What If the Security Deposit Won't Cover the Damages?

As a landlord, you know why the security deposit requirement for your tenants is so valuable. Even though rental properties will always go through some amount of reasonable wear and tear, the goal upon move-out is for the space to be at a very similar state to when the tenants moved in.

  • Thursday, May 2, 2019

  Security Deposits   

Value of a Security Deposit

As a landlord, you know why the security deposit requirement for your tenants is so valuable. Even though rental properties will always go through some amount of reasonable wear and tear, the goal upon move-out is for the space to be at a very similar state to when the tenants moved in. Any major damages can be taken out of the security deposit rather than having that money entirely returned, though clear communication should accompany the return of the remainder.

However, some unlucky landlords find themselves with damages that will cost more than the security deposit in order to repair. What should you do in order to ensure you are as effective as possible in getting your property repaired?

First Strategy: Know What Is Going On In Your Rental

You can begin to prevent losses due to damages even before your tenants move in. Once your tenants have signed their rental agreement, document in detail the state of the property: clear photographs and an audit of any pre-existing damage will help your case if anything goes awry later. This documentation makes it much easier to prove that damages were caused by the tenants later on. In most cases, you won't need the photos, but you never know which tenants will be the ones where the documentation becomes necessary: take them every time to be safe!

During the duration of your lease agreement, make it clear that you reserve the right to perform inspections; these inspections can reveal activities that aren't allowed or are likely to cause damage: if the apartment smells of smoke, for instance, you can make it clear that smoke damage can be expensive to repair, especially if it violates the terms of the lease agreement. Inspections don't have to result in eviction, but can rather nip things in the bud: finding a pet that isn't allowed within a month is much better than finding out the pet has been causing damages for the whole year!

As a lease agreement is running out, make an appointment with your tenants to do a walk through a few weeks ahead of their move-out date. This is especially helpful if you suspect a problem, but it is a kind way to conclude any tenant relationship. What the walkthrough does is allows the tenants the understanding of what matters to you: great tenants will be interested in getting their full security deposit back and will make small repairs or do deep cleaning that would otherwise be deducted from their deposit. However, this walkthrough can also be a wake-up call for tenants who may not realize how substantial their damages have been. Make it clear, while you still have their money, that you expect the repairs to be made. This is your first line of defense since some tenants will make the effort to repair what they can; any remaining repairs, hopefully, will be within the available amount of the deposit.

Second Strategy: Document, Document, Document

Even before you suspect a damages problem, make sure you are creating documentation on every single tenant and every property. You want every communication to be in writing and for you to retain a copy, since communicating your expectations to the tenants clearly helps your case if you end up in court. Research any requirements for Small Claims Court in your state even if you never want to take a tenant to court: you want to be able to provide all the documentation without fears that your case is worse than the case of your tenant. People behave erratically when they are attempting to avoid paying a debt, and you want to have everything you need.

Third Strategy: Send Demand Letters By the Book

So the 'worst' has happened: you have confirmed that the damages to the property, now vacant, are going to cost more than the deposit you have available. Now is the time for a demand letter; these letters make it clear what the tenant owes you and why. Include:

- A simple explanation of what property, what tenant, and what amount of security deposit you are referring to.

- An outline of the damages and the estimated costs for repair.

- A clear statement of the difference between the deposit and the estimated costs.

- A request for the tenant to remit payment, along with where and how that payment can be sent.

You can find specific language for these letters online, but make sure you retain a copy of the letter when you send it, and make sure it is dated. Often, tenants will pay the balance in order to move on to their next location free and clear, but you may have to send the letter a second time. If this happens, make sure you attach the original letter and include the amount of time that has passed in the second letter. This establishes that the payment is now late.

Fourth Strategy: Weigh Your Options for Small Claims Court

Even if you arrive at the point where multiple letters have been ignored, you may still have reservations about going to Small Claims Court to get your money back. There are a few contexts in which it doesn't make sense to go to Small Claims Court:

  • Know your investment going in: what are the filing fees to file a claim at Small Claims Court? If the damages don't exceed that fee, you are most likely going to waste time and money by pursuing the court claim. 
  • Know your tenant's circumstances: if your tenant doesn't have income at this point, as far as you can tell, winning in Small Claims Court will not guarantee that you can collect the winnings. Past lateness or missing rent payments may be a sign that your tenant won't be able to pay even if you receive a judgment.
  • Know your time invested to money gained ratio: If this is the first time you've considered Small Claims Court, it will likely require multiple hours to create your case, understand the system, and of course, work with the court. Even if you feel confident you could win, would those hours be better spent on other, more lucrative tasks? A few hundred dollars versus a few thousand dollars of damages can change this calculation of value.
  • Honestly evaluate your case: If you did all the initial three strategies, this probably isn't an issue, but if your tenant could potentially claim that the damages were pre-existing and you don't have the evidence to prove he or she is wrong, your case may not resolve the way you want it to.

For Small Claims Court to be the right way to go, it's important to see things based on the bottom line: are you likely to win, are you likely to be able to collect, and will filing fees and time eat away any benefits you gain? It can be frustrating to let a tenant disappear into the night after having caused substantial expenses for you, but it may be the best option in your particular case; chalk it up to experience and make the necessary changes in your practices to protect yourself next time. However, in the case of a former tenant with documented income who caused substantial damage that you've clearly photographed, court may be worth the time and expense.

Focus on the Bottom Line: How to Minimize Damages and Maximize Value

However strange it may seem, being a landlord is about maximizing value, not everything going perfectly every time: you want to be creating opportunities to charge competitive rent, maintain high-quality properties, and retain reliable tenants. At times, this calculation cannot be controlled and you'll encounter a tenant who accidentally or neglectfully damages your property. You don't have to sit idly by and watch your property depreciate in value or your bank account drain to make repairs, but you also don't have to go to court if it doesn't make sense for you. Make sure that every move you make is in service of that bottom line. Remember these takeaways:

  • Documenting everything, from photographs of properties to all communication with tenants, helps build your case to the tenant and to any future court that you've been doing everything by the book.
  • Communicating often with your tenants helps to cut problems off at the source, establish your expectations, and get the property returned to you in a better state than it might otherwise appear. 
  • Getting estimates quickly and sending demand letters promptly can recoup losses with tenants who know they don't want to go to court.
  • Going to court should make financial sense for you, so make sure you do it as a savvy move to recover losses, rather than as an automatic next step.
  • Learn from every tenant experience you have so that future experiences will be better!

With an airtight collection of strategies, you will very rarely have to deal with losses due to tenant damages; you'll learn over time exactly what works best with your tenants for ensuring excellent communication, property maintenance, and prompt payment. Contact us today to learn more about how VerticalRent can help you achieve your rental property goals.

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