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The Beginning of the End: Move-Outs & Security Deposit Disposition

Chris Claflin - Tuesday, December 1, 2020

Disclaimer: we are not attorneys. Nothing we cover in this episode of the Investment Property Geeks is legal advice. We are both licensed real estate brokers, so we can speak authoritatively in that sense, but nothing that follows will constitute legal counsel.

With all tenants, the day will arrive when it’s time to move-out. And, as an investment property owner, you should be ready. First and foremost, a system should be in place for tenants vacating your property. Notice should be issued in accord to standard procedures.

This system can be simple, but the expectation should be clearly set with the tenant. Will you be sending an email? Is it in writing in another format? Provided with a phone call? They should know what to look for. If a lease renewal isn’t in the cards, you commence the vacating process.

Landlord/Owner Move-Out Checklist Items

Whether you facilitate move-outs frequently or infrequently, you need a checklist. If you do it a lot, this saves you time. If you don’t do it a lot, this saves you from making mistakes.

  1. Have a plan for security deposits.

  2. Make a list of planned maintenance. 

  3. Schedule maintenance. Some lead times (say, flooring) will take longer than others. Get it scheduled.

  4. Consider order of operations for turnover. A general suggestion would be:

    • Major repairs/messes first

    • Minor/common repairs

    • Painting

    • Flooring

    • Painting touch up

    • Cleaning

    • Carpet cleaning

  5. Change the locks.

Jesse lived in an apartment complex once where the managers did carpet cleaning first and then did spackling and ceiling repair. By the time he moved in, it looked terrible. Do the mess first and then clean up flooring last.

Tenant Move-Out Checklist

In addition to a checklist that you will use, consider creating a move-out checklist for the tenant. This should be printable or digital and go room-by-room, highlighting the things they can check for or clean up. Provide helpful tips about things like mail forwarding or changing smoke alarm batteries. Add in contact info for recommended cleaners or carpet cleaners. All of the info you give should align with the expectations you have about the way the property looks at move-out.

As a property owner, you want the tenant to get back 100% of their security deposit. Of course, the maximum amount allowed by law should be deducted if the property needs maintenance. However, it’s a far better scenario if the tenant takes care of as much of it as possible. Set them up for success with a move-out checklist.

Move-Out: Utilities

Remind the tenant: utilities should be left on throughout the term of the lease. If they aren’t, utilities companies have to be contacted and then there is a lag between the time the last bill comes and when security deposits can be dispositioned. It’s a time-consuming process (can take up to 45 days). 

As a property manager, you want the power and gas to stay on. This keeps the property in working condition and ensures that you can show the property as soon as possible.

If you don’t already have a revert to owner (RTO) set up with the utility company, it’s best to do this before the tenant moves out. This way, you can avoid gaps in service.

Move-Out Inspection

A thorough move-out inspection is high priority. In addition to general assessment, your goal should be to get high-quality photos of anything that’s damaged. Document everything that will go into a work order. It may be helpful to put your finger next to the photo of the damage. This is great for stains and patches on walls. When you zoom in, you lose perspective on the size of the damage. Have a pen, your finger or other point of reference to indicate the actual damage and reference the scope of the issue. 

Jesse was at a property last week and took photos of the ceiling that looked horrible. The ceiling was blotchy and discolored. When he reviewed the photos, he realized that they didn’t look nearly as bad as it had in real life. Not all photos will perfectly reflect the actual condition of something in the home. Reference points can help.

If the property had a quality move-in inspection, you can easily compare and contrast every element of the space without any hassle or conflict. The “before” and “after” will be crystal clear. In the absence of that, a move-out inspection needs to be that much more scrupulous and careful so that you can move forward with security deposits and prepare the property for the next tenant.

Advertise the Property

Once your move-out protocol is in place, tenants have moved out, and maintenance has begun, you need to advertise the property. Ideally, you’ll do this 30-45 days in advance. Keep in mind, though, that you should not show the property until it is ready. You want to attract great tenants. Even if you tell the prospects what you’re going to do, the property will show poorly and attract less qualified buyers.

In addition to the actual points of repair, doing a little extra in terms of landscaping or cosmetic touch-ups can go a long way in helping your property show well.

Security Deposits

There are very strict laws in place that protect tenant’s security deposits. Historically, slumlords have abused the security deposit monies. This does a good job of protecting tenants but can make owners’ lives a little tricky.

Remember that a security deposit isn’t your money. You are legally holding onto someone else’s money until they cause damage and you charge them appropriately for that damage. If you never charge and get the damage repaired, the money legally belongs to the tenant.

By law, as an investor, you need to comply with your own state’s security deposit laws. In North Carolina, these funds have to be placed in a trust or escrow account. It’s not as simple as opening a checking account. It must be specified.

Security deposits can easily be disputed, especially if tenants are upset about something. You must be sure you have all of your t's crossed and i’s dotted, including knowing that where the money is being held is in compliance. If you don’t have one or have no interest in complying with this, you need to put your money with a reputable, licensed property manager. A company like this (like ours) will have a trust and escrow account that upholds the law.

Here’s some more detail on this all-important process.

Dispositioning the Security Deposit

Laws will differ by state. Again, we’ll reiterate that this isn’t legal advice. However, based on our years of experience doing this in South and North Carolina, here are the basics:

Interim Accounting

Within a certain timeline (typically 30 days), you’ll provide a detailed estimate to the tenant about the current deductions you foresee and expected future deductions that will impact their security deposit. Jump on repairs right away, because if you don’t state the costs in time, you could miss your window.

Deductions

There are things you can deduct and things that are non-deductible. 

Here are some examples of things you can deduct:

  • Carpet stains (this can be subjective and requires proper documentation).

  • Mismatched paint or marks.

  • Exceptional filth (often this applies to a specific item).

  • Dirty refrigerator and freezer.

You can already see that some of these are subject to interpretation. This is all the more reason to have your protocol, standards and written documentation in place. There are plenty of things that cannot be deducted from a security deposit.

Here are some things you can’t deduct:

  • Items in need of routine cleaning.

  • Regular wear and tear (shoes worn indoors).

  • Ends of blind strings.

  • Dirty items (windowsills, back patio, etc.).

Security Deposit Disposition Reminder

What you can deduct from a security deposit is limited to the actual cost you incur as the owner to repair that item. 

Example: the tenant puts the car into reverse and backs into the garage door, causing a little dent. You want to charge the tenant. If you do, you must get it fixed right away. You can’t deduct anything for the damage unless it was immediately fixed. Then, you can only deduct what it actually costs to fix the door. If you fix it yourself, you can’t deduct it.

Remember that the security deposit is never your money. It’s either the tenant’s money, the vendor’s money, or the tenant’s money that you’re refunding back to them.

You should have an itemized list of repairs. In North Carolina, this is written into the law. It will depend on your state what constitutes an “itemized list.” At Sunnon Property Management, we go into further detail, citing charges that relate to specific damage. We’ll break down the handyman’s charges and what services he performed. That may not be necessary but we operate on the side of caution. Too much specificity can backfire but you also want to be as fair and transparent as possible.

Learn How to Manage Your Property

Move-outs and security deposits are an important way to protect your investment. Tenants should pay what they owe and you should charge fairly. The right protocol will help you avoid frustrating conflict and subjective accusations. Having black and white standards and methods of proving and recording charges are essential. Document, document, document. Get photos, know the law, be reasonable or… hire somebody. It’s not expensive to hire a property manager. They will save and make you more money than they cost you (as long as they’re good at what they do). All of these logistics can easily be taken care of by professionals.


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