There are very few areas of property management that are producing as much tension, anger and conflict as the security deposit. To an individual tenant it’s a huge amount of money that they hope and pray will be returned to them in full. As a landlord it is really one of the major forms of safeguard against damage to property or failure to pay rent. But how can this money be used normally as it has historically been? If you combine an escrow account for security deposit with personal money or business money you risk losing everything and there is trouble because of the legal lingo and there is no trust between landlords and tenants. And there’s really no excuse not to use an escrow account for the security deposit. Instead of causing controversy and friction there is an escrow account that is now an enormously important part of any professional, open, and legal property management.
Understanding the Escrow Account A Neutral Third Party
It is, essentially, a holding vehicle owned and operated by an independent third party. Like an escrow account it is not affiliated with the landlord’s personal bank account. The main operating account of the property is also not associated with the landlord’s escrow account. This money gets deposited into an escrow account when renting a unit for purposes of a security deposit and when the lease term expires the funds are in the escrow account until the end of the lease term, when they can be distributed pursuant to the terms of the rental agreement as provided and with any reasonable deductions for lawful expenses itemized and communicated.
What is the principle? It is the idea here that the landlord is not only following best practices but he is actually building trust with the tenant, and he is actually implementing the duty of fiduciary responsibility he has for their tenant. This simple act of having the funds deposited in an escrow account in connection with the security deposit says that they are your property and that they will never be used to pay the mortgage on the premises or for an unexpected repair or replacement.
The Legal Imperative More than Just a Good Idea
In the case of most landlords, keeping a security deposit in an escrow account is not only an idea but an obligation they must fulfill with the tenant. Many states and even some local municipalities now have laws against landlords and tenants that clearly state precisely how a security deposit should be handled. If your landlord doesn’t comply with the state or local laws you could actually be fined for this and possibly face lawsuits. Landlords who mix up the deposit with their own money could easily get hit with a bunch of court fees as well as having no way to recover any part of the deposit for damages and even being sued for significant amounts in small claims court. Since you can create a special escrow account for security deposit accounts set up specifically for security deposit compliance, it is the easiest way to make sure you are doing everything legally without spending huge amounts of money on legal fees and judgments.
Building Unshakeable Trust with Tenants
The relationship between the landlord and the tenant is at its best a partnership. In our eyes, trust is the currency for a partnership, and hence when a tenant gives the landlord a security deposit for many this amounts to one or Baselane months’ rent their giving a great deal of trust, and putting that money into a mixed account will be going against the landlord you can see how clearly the tenant money will just be going into the landlord’s general checking account. On the other hand, when your tenant is told that his deposit is going to be put in a neutral bank account for the maintenance of security deposits, it is a great move. You’re professional and ethical and show respect for their financial contribution. And it very directly addresses one of the few fears a tenant might have about the landlord: Will I get my deposit back. When you completely encapsulate the question on the very nitty-gritty issue of when and where the funds are going to be available, you’re actually preemptively killing one of the most hated spots in the argument about lease agreements. A tenant who’s trusting their landlord will be able to respond with a smile, have a good understanding of the place, and always be a reliable and long term resident.
Streamlining the Move-Out and Disbursement Process
For best results, we recommend creating a security deposit escrow account as soon as possible in any way, it’s not hard to just set up a new account. The landlord has time to continue cleaning, repairing the unit, and advertising it to anyone else interested in buying the property, while the tenant is obviously moving and getting settled into their new home. No reason to enter into a heated, emotional fight over a security deposit, when you can have an escrow account make everything a whole lot cleaner! Because the money has been set aside all along, there’s no rush at the last minute to collect money for the cash refund. Many of the new platforms we use for this kind of technology are also well designed that let you move out without having to go back into your building to manually collect, or even walk into the room to manually pay your rental. This allows your landlord to then create a digital itemized deduction statement that they can send to the tenant in combination with photos and receipts for any repairs and cleaning that can be set up on the escrow account and the funds will be electronically transferred to the tenant while any amounts deducted from the security deposit will be sent back to the landlord. Thus you both keep the paper trail clear and each one can audit.
Financial Clarity and Simplified Accounting
Since all landlords, and especially those with multiple properties, the key to profitability is organization of your finances. Manually keeping track of security deposits, and getting them in a system where the deposit is kept in a different bank across multiple accounts, cannot possibly be too complicated. From what I understand, an escrow account to keep the security deposits in, and one that is specifically tied to the fulfillment of other financial transactions will help you manage that massive amount of information centralized. Picture having an escrow account for security deposit dashboard showing your entire security deposit holdings, which tenant and that property it is associated with and what is happening to that security deposit. Your world will be a lot more organized. That’s great for tax preparation and the ability to have a snapshot of your liabilities at any given time. It also allows you to tie it all to other property management accounting processes, rent collection, expense tracking, etc. better way to manage your finances should save you tons of hours of admin work and increase the likelihood of making a mistake.
Conclusion
The security deposit is by no means the centerpiece. Landlords whose tenants have taken the simple, wise decision of opening an escrow account (for managing security deposit) can easily keep all 2 big questions, the legal protection for landlords and tenants and the baselane in tenants as well as unprecedented efficiency in one of the most transactions in property management. Entire story: Creating an escrow account will be a small investment in peace of mind, professional satisfaction and the success of your business in the long run.