Deposits Defined
When deciding which fees and deposits to charge your renters, it can get pretty confusing, especially if you're unclear about what you're charging for. In general, a deposit is an amount of money that is either refundable or applied toward the rental amount.

Reservation Deposit: A certain amount of money collected upon booking that validates the rental contract. The reservation deposit can convert automatically into a security deposit.

Security Deposit: A certain amount of money that the owner holds until after the renters have left the property in case the property has incurred any damages. The security deposit (also called a damage deposit) is usually an amount above and beyond the rental costs and fees. The typical security deposit is $200 or 10% of the rental rate, whichever is greater.

Pet Deposit: A specified amount of money above and beyond the rental rates. The pet deposit is refunded after the guests' stay if no damage was incurred. If you prefer to charge a straight pet fee, see our article: Guidelines for Charging Pet Fees.

What you choose to call your deposit and how much you charge is ultimately up to you. Once you set that policy, you should include the amount in the rates sections of your vacation rental listings, communicate the requirements clearly to your potential guests, and reiterate the deposit guidelines and refund policies in your vacation rental agreement. Your rental agreement should also dictate what is considered a violation and which types of violations can result in partial or full loss of the security deposit.

When you confirm a booking, you should require your guest to pay the deposit and submit a signed rental agreement as soon as possible. Many owners require a turnaround of 24 hours for the rental agreement, but it is polite to give some leeway if, for example, the booking was made over the weekend and your guest can't fax the agreement back until Monday.

Cancellation Policy
Your rental agreement should not only spell out your deposit policy but also your cancellation policy. Because you do not run a hotel that will receive walk-in traffic, it is important that you protect yourself from cancellations.

When it comes to cancellations, you are not entitled to keep the security deposit.  Many states have strict laws that prohibit owners or landlords from withholding a security deposit without just cause, which would require you to present receipts for repairs or replacement of damaged items.  If, however, you charge a reservation deposit to secure a booking, you may be entitled to keep this money depending on the wording in your contract. 

Once you get within 60-90 days of the rental dates, you may want to charge higher penalties to protect yourself from the lost revenue. Either way, if you rebook those dates, it is honorable to refund the cancelled guest. Perhaps they will even rebook in the future.

A word of caution: You could run into a situation where a renter calls you several days after you receive the deposit check and cancels due to an emergency. If they request the return of the deposit, you should do so in a prompt manner. But do NOT send them the refund until their check clears your bank. Although they represent the minority, there are people who will try to defraud you by sending a bad check and then requesting a refund before their check clears.

Confirming Bookings
Once you've spelled out your policies in your rental agreement and received a signed copy from your guests, it's time to turn your attention to the deposit. If you accept deposits by credit card, process the charge right away. If you accept deposits by check, set a deadline of 3 to 5 business days to receive the deposit by mail. Once it arrives, cash it immediately.

If a check bounces, that could be a sign of trouble, but there could also be extenuating circumstances. Your first step should be to talk to the renter and find out if there was some kind of miscommunication. If so, ask them to either overnight another check or send secured funds. If round two doesn't work, this is probably a sign not to rent to this person. Consider it damage insurance for your troubles.

We recommend not updating your calendar to show these dates as booked until the deposit is received and/or cashed. Until that time, it is acceptable to continue to accept inquiries for those dates. Just make sure to tell the other potential renters that there is a pending booking and request their contact information in case you end up with an opening. Just be sure to let them know if the pending booking is secured so you're not leaving them hanging.

Payment Schedules
Once you've determined your process for handling deposits, you'll want to set up a payment schedule for the balance. The key to scheduling payments is to make sure you receive the entire rental payment and any other fees well in advance of the guest's arrival date at your vacation home.

Typically you should break the balance into at least two equal installments. You should receive the first payment about 60 days prior to the rental date. This will give you ample time to get another renter in the unfortunate event of lack of payment or cancellation. The balance should be paid 14-30 days prior to the rental date. This provides plenty of time for funds to clear before you send directions, keys or lockbox codes. If the reservation is last-minute, you should request payment in full to confirm the booking.

Remember, the more time you give yourself, the more flexibility you have with payments. With enough time, you could even split the transaction into multiple payments, which might be preferable for some of your guests.

Withholding Deposits
Now that we're clear on your deposit policy, you have to remember why you set this up in the first place: The point of the security deposit is to protect you in the event that your property incurs damage during a guest's stay. Your housekeeper will play a large role in determining when or how something was broken. Because he/she will be there before and after a guest's stay, they should have a pretty good idea of when the damage occurred and who was responsible.

First and foremost, never return a deposit until you or your housekeeper has inspected the property. If you are worried that there might be more things that you didn't notice, then hold the deposit until you can do a more thorough inspection, but make sure to do this before the next group checks in. Just be sure to comply with laws governing how deposits are held. Some states set a deadline for returning deposits and may require that you hold the deposit money in a separate, interest bearing escrow account.

When it comes to identifying damage, keep in mind that you should expect some normal wear and tear, and accept the fact that things will sometimes break. If your guests call to let you know about accidentally damaging or breaking something in your home, you can always tell them to simply go out and replace it. That will really make things easier on everyone.

However, if your renters didn't adhere to your rental policies and you find damage to your property, it's perfectly acceptable to withhold a portion (or all) of the deposit. If you retain any portion of the deposit, you should keep sound records of the associated costs. You are only allowed to keep actual costs associated with repairing or replacing the damaged item(s), which should also be clearly defined in your rental rules. Don't use deposits as a way to nickel and dime your renters out of more cash or as an opportunity to make extra money for your inconveniences.

What if your housekeeper will not have time to resolve the problem in time for your next guests' arrival? If the damage to the property will inconvenience your next set of renters, you can compensate them and have it taken out of the original guests' damage deposit, BUT you must have that written and signed in your rental rules.

So there you have it. It might seem like a lot of information, but accepting and refunding your security deposits should hopefully be a straightforward process. Although it might seem like extra steps, you are protecting you and your renters from the financial burdens of collecting money.

How to Accept Security Deposits by Credit Card How to handle deposit payments from your vacation rental guests via credit card Keeping Damage Deposits vs. Charging Fines Two ways to go about preventing damage to your vacation rental property   Sample Vacation Rental Refund Letter (When Withholding for Damages) For the very rare occasions when you have to withhold a portion or all of the damage deposit   Security Deposit Dos and Don'ts When to make a “to do” about renter-related damage...without ending up in small claims court © Copyright, Christine Karpinski 2006, U.090304.LC