Follow HUD Rules When Itemizing Deductions from Security Deposit
Security deposits provide owners with some degree of financial protection when a resident moves out of a unit and fails to fulfill obligations under the lease. Security deposits can be used toward reimbursing unpaid rent or repairing any damage the outgoing resident may have left behind.
If you decide to withhold all or part of a security deposit to repair damage left by a departing resident, you need to ensure that your paperwork is meticulous to defend against any challenges to your use of the security deposit. At the minimum, HUD requires you to send an itemized list of any unpaid rent and all damage deductions, along with a statement of the resident's rights under state and local laws, to the resident within 30 days after he leaves [HUD Handbook 4350.3, par. 6-18 (C)(2)]. Your state may have additional requirements when refunding security deposits.
The problem is that many owners' itemizations include only limited details about damage and repair work. A haphazard approach like this can harm you in two ways. First, it makes more disputes likely, because the ex-resident won't know exactly what damage you found and what you had to do to fix it. And worse, if the ex-resident complains or sues, HUD or a court may find that you wrongfully withheld some or all of the security deposit, because you didn't provide enough detail to justify the damage deduction.
Be Specific, Collect Proof
When you retain all or part of an ex-resident's security deposit, James Bownas, a real-estate attorney with experience representing HUD-regulated sites, recommends that you “explain why you considered the damage worse than ordinary ‘wear-and-tear’ and how you spent the money you deducted.” If you don't, HUD or a court might say that the deduction was “arbitrary” and disallow it.
According to HUD, it is at the owner's discretion to develop criteria to distinguish between wear-and-tear and damage [HUD Handbook 4350.3, par. 6-29 (D)(3)]. For example, an owner would probably consider a worn carpet that has reached the end of its useful life as “wear-and-tear,” and a relatively new carpet that has rips and tears would be classified as “damage.” In this case, the owner would use the security deposit to cover the repair costs or replacement costs for the worn carpet that has reached the end of its useful life.
When you're filling out a move-out inspection report or itemizing damages to send to a resident, Bownas recommends being as specific as possible. In Ohio, courts have been known to penalize owners for lack of specificity when itemizing damages, he notes. Because penalties for wrongfully withholding a security deposit can include double or triple damages plus interest and attorney's fees, even a small mistake can get expensive. And if you repeatedly withhold security deposits without complying with HUD rules, you could violate your HAP contract or regulatory agreement, and maybe even lose your right to participate in HUD programs, says Bownas. Along with the damages itemization, the following suggestions will help you avoid challenges and complications when you make deductions from the resident's security deposit.
Include proof of damage. Include copies of whatever proof you have of the damage along with the itemization. These can include copies of digital photographs, work orders, and invoices. If one of your staff repaired the damage, include a copy of the work order. If you used an outside contractor, include a copy of the invoice.
Encourage resident participation. You should encourage residents to accompany you on the move-out inspection. Upon a resident's request, the resident must be allowed to attend the move-out inspection [HUD Handbook 4350.3, par. 6-29 (D)(1)]. If a resident is with the owner or manager during the inspection, disagreements between the owner and resident regarding unit damage can be resolved up front. If a resident doesn't want to participate, the owner or manager may do the inspection alone.
Five Points to Cover in Itemization
You should include five points in an itemization. Be sure you cover all five for each item you list.
1. Item damaged. List each damaged fixture, piece of furniture, or appliance separately. Separate lines for “dishwasher,” “stove,” and “refrigerator” are much better than one line for “kitchen appliances.”
2. Location. Note the room in which the damaged item is located. This is especially important for walls, ceilings, floors, and windows. But you should also specify the room when itemizing light bulbs, lighting fixtures, smoke detectors, and other items found in more than one room of an apartment.
3. Kind of damage. Saying that an item suffered “damage” is too vague, even if you dress up the word with adjectives such as “substantial” or “excessive.” You must describe how an item was damaged. A single descriptive word such as chipped, scratched, stained, torn, cracked, or burned should suffice.
4. Repairs needed or done. Briefly describe what you must do or have already done to fix the damage. Use precise words such as spackle, sand, paint, shampoo, steam, and deodorize. Courts prefer descriptive words like these to general ones such as clean and repair, says Bownas. Also, if you replace rather than repair the item, say so on the itemization.
5. Repair or replacement cost. Say how much it will cost to repair or replace each item. If you've already made the repair or bought the replacement, list exactly what you spent.
Some owners give residents who have announced plans to move out a schedule listing the cost of repairing or replacing specific items. If you do this, stick to this schedule when you do your itemization. If you don't use a move-out cost schedule and you're sending out the itemization before you've done the repair or gotten an invoice, you should estimate the cost. As long as your estimate is “reasonable”—that is, based on the going rate for similar repairs or replacements—a court should allow it, says Bownas.
Remind Resident of Dispute Meeting Right
HUD rules not only require you to give residents an itemized list of security deposit deductions, but also require you to tell them that they have a right to meet with you to discuss any disagreements they may have with the deductions [HUD Handbook 4350.3, par. 6-18 (D)]. If you don't do this, or if you don't meet with a resident who wants to meet, the resident is entitled to a refund of the full security deposit, plus interest.
So make sure you tell residents in your itemization letter that they have the right to meet with you to discuss any disagreements they might have with any deductions you made to their security deposits. You can adapt and use our Model Letter: Notify Resident of Damage Deductions and Meeting Right. Also, be sure to keep a written record of the meeting in your files for three years for inspection by the HUD Field Office or contract administrator [HUD Handbook 4350.3, par. 6-18 (D)].
PRACTICAL POINTER: The amount of the security deposit that you're allowed to collect from residents varies by HUD program. See “Take Five Tips to Protect Your Security Deposits,” to make sure you have the maximum security HUD allows against resident-caused damage.
James H. Bownas, Esq.: Zaino and Humphrey LPA, 5775 Perimeter Dr., Ste. 275, Dublin, OH 43017; www.zandhlpa.com.
The Right and Wrong Ways to Itemize Damage and Repairs
When making deductions from security deposits, be sure to itemize damages in sufficient detail. If you don't, HUD or a court might decide that you wrongfully withheld the security deposit. Here are some examples of the right and wrong ways to itemize damage and repairs. Check with your attorney about how itemizations should be handled in your state.
- Repainting = $50
- Pet damage = $100
- Broken window = $150
- Bathroom repairs = $75
- Spackle and paint over nail holes in hallway walls = $50
- Shampoo living room rug to remove pet urine stains = $100
- Replace cracked glass in window bathroom = $150
- Refinish scratched porcelain in bathroom tub = $75
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