Security Deposit Fees

Security depositCredit worthy tenants will often agree to pay a non-refundable fee to “buy-out” of a security deposit requirement. The fee is typically 25% to 50% of the deposit amount.

Most tenants receive a full refund of their security deposits. That’s good, because it means the tenant met all their obligations and the property was acceptable when they moved out. On the other hand, it hurts to write those refund checks, doesn’t it? What if you could legally keep some of the money, without anyone getting mad at you?  You can!

Think about offering your best tenants a security deposit buy-down. Suppose the deposit is $1,000. Your tenant has great credit, a steady job, and causes no problems.  Routine inspections show a well-kept and clean home.

What if, four months into the term, you offered to immediately refund $500 of the deposit, but only if the tenant pays a $500 fee?  In other words, he gets half, and you get the other half. There is no security deposit after that.  If the tenant defaults, you at least still have an extra $500 to help cover your losses. If the tenant does not default, you just made an extra $500 of profit.

If you do this, make sure you have a clause in your lease that allows you to demand a full deposit, again, under certain circumstances. That might be triggered if the tenant is more than 10 days late paying the rent, or if there is any other default under the lease, even if the tenant cures the default after notice.  You might also require a full deposit if the tenant is unemployed more than two weeks.

Why would a tenant go for this? Because $500 today is better than $1,000 nine months from now, that’s why.  It doesn’t make any economic sense, but from a human nature perspective, it’s entirely predictable.  Cash in on this insight, by cashing in!