The Property Management Shop
by Marc Wilson
Q. I have heard that apartment building managers sometimes accept different types of deposits from potential tenants in order to hold apartments. These deposits include non refundable credit check fees, good faith deposits, deposits to hold apartments and application fees. I usually request a good faith deposit from prospective tenants to hold an apartment until we meet and sign a formal rental agreement and collect the balance owed. Sometimes the tenant will decide not to rent the apartment and then I keep the good faith deposit. Is this legal? Can I charge a non refundable credit check and application fee?
A. I don’t think non refundable screening and application fees are a good idea for a lot of reasons. This rental market is slow at best and rapidly going in the wrong direction. Why would you want to make yourself less competitive by charging your prospective tenants a bunch of non-refundable fees? Do you think that prospective tenants want to incur costs and fees without even knowing if they are going to be approved for the apartment? This isn’t a good way to start a potentially long-term relationship. In addition, you as the property owner should bear any costs incurred with regard to credit checks and application fees, which tend to be small. A credit check is practically free and used at the sole discretion of the owner. If you don’t want to pay for a credit check, then don’t order one. To answer your question, you can legally charge up-front, non refundable fees for the actual costs of credit reports, unlawful detainer searches, screening reports and other costs to obtain, process and verify screening information. These costs cannot exceed $30. Take my advice and don’t go down this road.
This does not mean that you should not collect some money from potential renters before you go through the time and expense to review their applications. As you are no doubt aware, screening potential applicants, preparing rental agreements and scheduling meetings takes a lot of time and energy. You do not want to expend this time and energy unless and until you are reasonably sure that the tenant wants to rent the apartment and will follow through.
In my experience, the only way to become reasonably assured of the tenant’s willingness and ability to follow through is to collect a non-trivial amount of money with the rental application. Personally, I will not consider any rental application that does not contain a $300 good faith deposit and a signed offer-to-lease document. The offer-to-lease document must spell out the costs and terms of the apartment in question—rent, security deposit, move-in date and terms and conditions regarding the $300 good faith deposit. The prospective tenant should understand that he/she would never see the $300 again, unless he/she is not accepted as an applicant. This money is applied to the first month’s rent and security deposit.
This procedure will prevent you from working on applications that have no probability of coming together. I have people withdraw their applications about 5 percent of the time. This is an infrequent occurrence, for a prospective tenant does not give me his/her application, sign the offer to lease, and tender $300 unless he/she is seriously interested in the apartment. I’ve been doing business this way for over 15 years and have probably kept 20 good faith deposits in that time.
I was taken to Small Claims Court about five years ago because the prospective tenant was upset about the loss of her $300. The judge read the paperwork and immediately ruled in my favor. I would have gladly returned the tenant’s money, because it’s cheaper than spending all morning at Small Claims Court. But I honestly wanted to know if I was doing anything wrong or unethical.
You must understand that the point here is not to turn good faith deposits into a profit center. The point is to be efficient and not waste time processing applications that are not made in good faith. You want the tenant to understand that his/her application to rent is not a trivial document but rather a contract with financial consequences. The problem that most owners have with both good faith deposits and misunderstandings in regard to retained deposits can be traced to poor or nonexistent paperwork. Don’t take short cuts. Always document your transactions with well-written, professional contracts. The San Francisco Apartment Association has Offer to Rent documents for sale. I use my own custom documents with a cover sheet. Let me know if you would like a copy.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Marc Wilson has been managing and selling San Francisco apartment buildings for over 15 years. Please send your questions concerning property management issues to Marc Wilson at 1699 Van Ness Avenue, SF, CA 94109. He can be reached at 415-229-1275. Copyright © 2003 San Francisco Apartment Magazine