The Hidden Costs of Traditional Security Deposits

The Hidden Costs of Traditional Security Deposits

Author: Kasee Godwin
Date: 03.27.2023

“In order to move in, we need to hold the first and last month’s rent, please,” said every property manager in the country. 

But why? Security deposits are a significant upfront cost tied up for the duration of a resident’s  lease. That’s money the resident will not see again until their lease ends, if at all. It’s not exactly an industry secret that upfront security deposits have a negative reputation with renters, and we can see why. But security deposit costs aren’t only felt on the renter’s end. Property managers assume a great deal of expense and risk in asking for and managing these funds.

Outside of negative resident sentiment, have you ever thought about how traditional lump-sum security deposits can negatively impact your property’s bottom line?

Lost rental income

Do you have vacant units just sitting empty while you wait to find a fully qualified resident who can afford and is willing to hand over a hefty deposit? If so, requiring a security deposit costs you lost rental income.

Traditional deposits can lengthen the leasing process or terminate it altogether. Deposits are inconvenient and may present a significant financial burden to potential renters.

Fully qualified renters can find it challenging to come up with these funds along with their other expenditures. Moving is already expensive, and typical security deposit costs can range from one to three times the cost of a rental unit.

And objecting to a security deposit isn’t always a matter of financial ability. Renters who can afford the payment may find it unacceptable to turn a large sum over to their property manager when they could be purchasing new furniture, paying for movers, settling debts, or getting through the move with more savings in their nest egg.

In the past, renters were forced to deal with it as the property manager dictates the conditions of a move-in and traditional security deposits were the only option. However, new financial mechanisms now allow property managers and owners to hedge against the risk of damages without requiring any upfront payments.

Prospects are beginning to look for rentals with alternative security deposit options, and property management companies that still require traditional deposits risk losing out on qualified residents.

Legal compliance, security deposit regulations, and interest payments

The security deposits a manager collects belong to the resident unless forfeited due to property damages (typically assessed at move-out). Properties managers and business entities holding these funds are required to handle them with care and diligence. Funds can only be withheld for specific legal reasons.

States set various guidelines for property managers to comply with. Many require landlords to pay their tenants interest on collected and held security deposits. Property accountants may need to disclose the account’s prevailing interest rate every six months and at the end of each lease, some states require bookkeepers to list the interest rates for every resident for each six-month period.

Some states require property managers to keep security deposits in interest-bearing accounts or interest-bearing escrow accounts. Some states ban property managers from mixing security deposits with other assets or funds. Properties also may need to provide tenants with the account’s location or account number. 

There are firm guidelines and stipulations regarding security deposits, and missing a step leaves property managers vulnerable to claims.

Admin, Accounting, and Legal Expenses

Managing security deposits costs property managers hidden management, accounting, and legal expenses. Collecting, maintaining, reconciling, and refunding security deposits cost significant time and effort.

Property managers must get deposit agreements signed, collect payments within specific timeframes, maintain and provide interest records, track forwarding addresses, etc. This represents a high administrative burden that translates into higher labor costs – whether accounted for or not.

Accounting is just more complex when security deposits are involved. Property managers have more bookkeeping to do and potential tax implications to consider.

Refund Expenses 

Security deposit refunds may bring unexpected costs from clerical errors, lost mail, and other unexpected issues. These expenses are always borne by the property management company.

To send a check out by certified or registered mail costs around $5 to $15. Lost checks must be canceled and reissued at $15 to $35 per stop payment request.

Properties or portfolios that don’t accurately track when refunds need to be issued or where those refunds should go can pay thousands per year in refund-related security deposit costs simply due to canceled and reissued checks.

Digital transfers don’t usually get lost and are far easier to track, but banking fees can make this more expensive than issuing a check.

Financial transaction fees add up quickly and those aren’t the only security deposit costs to consider. You then have to factor in the possibility of legal disputes.

Security Deposit Disputes and Lawsuits

The most expensive security deposit costs are caused by disputes between the property owners or managers and residents regarding what is owed, what was refunded, and whether a refund payment was sent in time.

Residents have the right to dispute partial refunds or non-refunded deposits. And renters who disagree with their refund amount can sue in small claims court to retrieve their deposit and punitive damages.

Renters can also sue for late deposit refunds. States may set deadlines for managers to process and return security deposits. Residents who receive refunds past these deadlines have the right to take their property management company to small claims court. Renters in certain jurisdictions can sue for two to three times the security deposit cost if a refund is sent late or wrongfully withheld.

Refund deadlines vary by state. Landlords in Alaska, Arizona, and Washington must return deposits within 14 days of a tenant surrendering the property. Landlords in Texas have 30 days, while landlords in California have 21. Only Tennessee and West Virginia haven’t set specific return deadlines.

You can read more about state security deposit laws here.

How much do security deposits cost you?

Security deposits are vital to a well-maintained portfolio. They offer financial protections against damages and unpaid rent. However, security deposits are not without their downside when you factor in high administrative costs, reduced rental prospects, and a decent chance that residents will sue for anything from a late check to a withheld deposit refund.

Renters often drag their property managers into court to fight for their deposit. The administrative burden and high legal fees cost far more than the deposit.

Don’t let traditional security deposits burden you or your residents. There is a way to protect your company against financial losses in the event of damage or evictions without asking residents to shoulder that financial burden.

Qira is proud to offer a security deposit alternative solution that allows you to offload security deposits from your onsite property management team while allowing residents to keep their finances within their control.

We let you give renters the option to opt into an agreement with Qira for a low monthly fee (as low as $5/month). We then assume the risk, pay you if a resident damages the property, and settle things out with residents, so you don’t have to.

It’s a done-for-you managed security deposit solution that keeps things fair and reasonable for all parties. Book a demo today to discover more!

kasee-godwin-80x80

Kasee Godwin

Position: Director of Marketing
Social Networks

Kasee is the Director of Marketing for Qira. She has nearly 15 years of experience in the real estate marketing industry, including 10 years on the client side. In her spare time, she enjoys reading science fiction, exploring new wineries, and fostering Golden Retrievers.

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