Security Deposit Policies: Dos and Don'ts
When to make a “to do” about renter-related damage without ending up in small claims court
Security deposits fall into the gray area of vacation home renting. There are general rules of thumb that you should know, but some of security deposit practice relies on individual discretion. If you follow these general recommendations we are confident that you will manage to avoid most pitfalls.
DO Consider your weekly rate when determining your security deposit. Charge $250 or 10% of the rental price, whichever is larger. Although you are free to charge whatever you like, this is standard practice.
DON'T Forget to refund a renter's security deposit. Most states have laws that define exactly how many days you have to refund the deposit (typically around 14 to 45 days), but in every state it is illegal to keep the deposit without just cause.
DO Check for deadlines and restrictions before choosing a security deposit payment method. Whatever your approach to security deposits, be it charge and refund or preauthorization, make sure you weigh the pros and cons of each. A disadvantage with charge and refund might be incurring two transaction fees (one for charging and one for refunding).
With preauthorization there is a danger of time restrictions. Because you are holding money, a bank may impose a maximum holding limit of 30 days. Also, the bank may charge you a fee to do this. If you prefer preauthorization, give yourself plenty of time to acquire the security deposit once your renters have left.
DON'T Use security deposits as a way to nickel and dime your renters out of more cash. Some things are just the cost of doing business.
DO Include specific violations that would result in partial or full loss of a security deposit in your rental agreement. Although it's hard to think of everything, be as comprehensive as possible so your renters have an idea of what is considered a violation. 
DON'T Keep a security deposit out of spite or because you think you've been inconvenienced. If you don't have a receipt for it, you shouldn't charge ‘em for it. Simple as that!
DO Process security deposits right away, either by charging the credit card or cashing the check. If there is a problem, give your renters the benefit of the doubt, and have them confirm their information or ask them for a different card. If round two is unsuccessful, then that's probably a sign that you shouldn't allow them to rent.
DON'T Return a security deposit before you or your housekeeper has inspected your property. There is no recourse once you refund.
DO Develop close relationships with your housekeepers. They are your eyes and ears, and the responsibility of reporting renter-induced damage oftentimes falls on them.
DON'T Forget to make a visual record of the damage. Try keeping a digital camera handy for your housekeeper. If damage does occur, this is an easy way to capture it before you repair or replace it.
 DO Minimize fallout with other guests if you aren't able to fix damages that occur before they arrive. Send them out to dinner on you. Compensate them for whatever inconveniences they might experience. Be sure to keep all your receipts because these associated costs should come out of the previous guests' security deposit. Note: this must be specifically written and signed in your rental rules, so be sure to amend your rental agreement accordingly.
DON'T Assume you have no recourse if renters cause more damage than their security deposit covers. Consider the following three options. Option 1: Absorb the cost (if it's a nominal amount of $50 or less). Option 2: Attempt to recover the money by speaking with the renter directly. This tends to work well with renters who report the damage themselves. Option 3: Take legal action if the renter refuses to pay. Depending on the state(s) in which you and the problem renter reside, you may be able to take them to small claims court. However, it would probably be wise to consult an attorney before taking action.
DO Consider using preauthorization if you are concerned your security deposit will be a barrier to short-stay renters. In this way, renters are only charged if there is damage. Otherwise, the account is never charged. You should include this in detail in your rental rules and your listing. It might be just the thing to win-over those cash-strapped yet conscientious renters.
DON'T Fail to familiarize yourself with state laws governing the maximum length of time you can  withhold a deposit. Some states even require security deposits to be held in a separate, interest-bearing escrow account.
DO Give your guests paying by check approximately 3 to 5 business days to pay your security deposit after they receive your rental agreement.
DON'T Forget to be a “defensive homeowner.” With luck, you will never have to contend with most of these situations, but you should craft your rental agreement as though they will unequivocally happen to you. This will force you to create fair policies when you are level-headed (rather than after damage occurs). Also, because your renters have to sign your rental agreement, they will have agreed to your policies ahead of time – saving you time and trouble in the end.
With these suggestions in hand, go and create superhero security deposit policies. Never wonder what to do in the midst of a security deposit debacle again!
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Is there anything you wish you had known before you wrote your security deposit policy?
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