After you've found a new place to live, your prospective landlord may request a holding deposit while the details of the lease are worked out. Essentially, the money goes to keeping the property off the market until you've signed the lease or chosen to go another direction.
Here we'll try to cover the basics around holding deposits. As always, if you have any questions, thoughts, or concerns, you can contact me by email.
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There are three key pieces of paperwork that will save you a bunch of headache:
- An agreement clearly stating the terms of the deposit.
- Proof of the transaction in the form of a receipt.
- The final copy of the lease you'll have to sign should you choose to rent the unit.
Also, it's best to avoid cash. Checks, cashiers checks, credit cards, venmo, etc. are recipient aware and keep record of the transaction.
Why Do Holding Deposits Exist?
The motivation behind holding deposits vary. Here's a brief list of reasons why a property manager may request a holding deposit:
- To curb the financial risk of a tenant not signing a lease.
- To give a prospective tenant space and time to travel or fulfill other obligations.
Holding deposits are not application fees. If the lease is signed, the holding deposit in its entirety should generally be applied to the security deposit or refunded to the tenant.
Holding deposits are not security deposits. Security deposits are typically larger and exist as insurance against damages to the unit. Holding deposits protect against the lost opportunity of finding another tenant.
When Are Holding Deposits Taken?
Holding deposits are taken after someone has submitted an application and before the lease, in its final form, is signed.
It's important to make sure that any / all lease negotiation takes place before a holding deposit is taken. Why? How can you negotiate promises when you lose $300 for not signing a lease? :).
What Are Some Common Holding Deposit Issues?
The internet is littered with holding deposit problems. The issues vary from scammers stealing intended holding deposits to property managers mishandling the follow through.
Here are some common problems that popup and should be avoided / managed:
- A scammer creates a fake listing and asks for a holding deposit upfront.
- A property manager asks for a holding deposit in cash.
- A property manager asks for a holding deposit without an agreement.
- A property manager asks for a holding deposit before sharing the lease.
- A property manager asks for a holding deposit while terms are being negotiated.
Beyond scams, holding deposit problems can be mitigated by:
- Having an agreement clearly stating the terms of the deposit.
- Keeping proof of the transaction in the form of a receipt.
- Having the final copy of the lease you'll have to sign should you choose to rent the unit.
What Does A Holding Deposit Agreement Look Like?
In general, holding deposit agreements should contain the following:
- The amount of the holding deposit.
- The name, company, address, and contact information of the property manager.
- The name and contact information of the tenant.
- The address of the property to be rented.
- Criteria for the lease to go through.
- What happens with the deposit if the tenant signs the lease? If not?
- What happens with the deposit if the landlord refuses to move forward?
- A copy of the lease in its final form that will be signed.
Most of the above was sourced from Nolo's wonderful guide on holding deposits from a landlord's perspective.
Something that we felt was left out of Nolo's guide, which is particularly useful for renters, is how to handle cases where the property manager backs out. Also, a copy of the lease that will be signed.
Why is a copy of the lease post-negotiation important? It's simple, if you don't sign the lease, you'll lose some or all of the deposit! If a property manager is being forceful, it's probably best to find another place to live.
Here are a few example agreements that we found on the internet:
- http://www.accessrealestateservices.com/files/Holding Agreement.pdf
- https://web.sdcaa.com/external/wcpages/wcmedia/documents/Rental Forms/150Form.pdf
My Landlord Didn't Give Me An Agreement
Generally speaking, it's best to have an agreement. If the property manager doesn't provide one, find one for them.
Unfortunately, many private landlords opt to handle holding deposits informally, which is fraught with complications. What happens if the landlord never returns the deposit? What happens if they partially return it? What if it's never applied to the security deposit? What can happen varies based on the laws in your city, county, and state. It's often best to talk to someone at a tenants union or housing rights group before taking someone to court.
What Should I Change Or Add In The Agreement?
We prefer agreements that are fair and balanced. At the end of the day, it's up to the renter to choose what they sign. The following is a list of amendments, additions, and subtractions that can help make an agreement more fair.
Agreements may have a provision that allows the property manager to charge for legal fees incurred. It should be amended to become a two-way street:
If any legal action or proceeding is brought by either party to enforce any part of this Agreement, the prevailing party will recover, in addition to all other relief, reasonable attorneys' fees and costs.
The agreement should detail what happens if the landlord denies the unit to you.
I agree and acknowledge that Landlord may choose not to rent to me for any reason, however, upon Landlord so electing not to rent to me, I will be entitled to a full refund of the holding deposit.
An explanation of what happens if the unit isn't available in time.
In the event the Applicant signs a rental lease agreement and the unit is not available on the beginning date of the rental lease agreement due to a prior tenant holding over, the Applicant shall be returned the holding deposit, any security deposit and any advance payment of rent.
Transfer To Security Deposit
If there is no provision about the holding deposit being refunded or transferred to the security deposit, add this:
If Applicant signs a rental lease agreement, Landlord will apply the holding deposit to the security deposit.
A copy of the final lease should be attached and noted in the agreement:
A copy of the lease is included with this agreement.
If there is a provision giving the landlord a right to deny and hold on to the deposit, it's probably best to remove it.
What Does A Receipt Look Like?
Any transfer of money should be accompanied with a receipt. Holding deposits aren't any different. The four key pieces of information that should be on the receipt are:
- Name, address, and phone number of the landlord.
- The date of the transfer.
- Some text stating that the landlord received the amount of the holding deposit.
- A signature by the landlord.
Security deposit receipts can act as a great point of reference. Here's an example: https://www.jotform.com/pdf-templates/rental-deposit-receipt-template.
Unfortunately, many property managers will ask for cash and not provide a receipt. It's best to push for one and or forgo the unit altogether. Proof of the transaction may be the deciding factor to a judge when trying to get your deposit back.