Move-in fee v. security deposit

[Joey Nakayama]

As a Chicago landlord, I've noticed many local apartment listings that ask for a non-refundable move-in fee instead of a security deposit. I suspect this is partially due to Chicago's strict laws regarding security deposits.

Fellow landlords, where do you fall on this issue (especially you Chicagoans)?

And for any renters out there who have weighed these options, what do you think?

[Marcia Maynard]

What you can do is dependent on the landlord-tenant laws for the jurisdiction of the property. What works is dependent on the specifics of the market.

We charge: application fee/move-in fee/security deposit/first month's rent. For a typical 2BR/1BA duplex unit that would be $40/$150/$600/$660-$690. For a typical 3BR/1BA house it would be $40/$200/$800/$1000. We specialize in "affordable" housing, which means on the low end of the rent scale, clean & well maintained, but a bit dated, in B or C neighborhoods that have a reputation of being safe and desirable.

If a prospective tenant questions the move-in fee (rarely does this happen) I explain it is to cover the costs that we incur when moving in a new tenant, such as changing the locks and administrative processing.

We prepare a folio to give the tenant that is a welcome packet of useful information and also contains the rental contract. On move-in day we surprise the new tenant with a move-in gift package of our favorite cleaning products in a cleaning bucket, a new cutting board, toilet paper, liquid hand soap, paper towels, disinfectant cleaning wipes, dish washing liquid or dishwasher detergent. We provide the tenant with use of drop cloth floor runners and furniture sliders for one week to make it easier for them and to protect our property from unnecessary damage. We also have a bucket of "approved hanging devices", a small hammer and a picture measuring and leveling device that we loan them for one month.

[Jonathan Pliszka]

@Joey Nakayama I'm in between on this as I see value in both. My managing brokerage does a lot with rentals so I come across this quite a bit. It seems that the big property management players have bypassed security deposits all-together because of the CLTO. I've commonly seen between $250-400 for a move-in fee for each adult applicant in lieu of a security deposit. Not only does this alleviate a lot of the potential legal headaches, but cuts down on their administrative upkeep as well. Furthermore, that's now their money.

For me personally, I'm one guy and simply collect a security deposit at this point. These large property management companies all have professional staff and there's much less at stake for them if their guys need to go in and make repairs. It's much more costly for me to do so.

In any event, in each case, it all comes down to tenant screening. I'm interested in seeing what other folks around Chicago have to say about this.

[John Weidner]

I'm moving in this direction. For you Chicago experts is there anything stopping collection last months rent as well as a move in fee?

Does RLTO have any power on prepayment of rent?

[Account Closed]

If you don't collect a security deposit, what is the incentive for tenants to leave the place in good condition knowing that they are not getting any money back regardless of how they leave it? Also, if they don't pay their last month's rent, then you don't have the security deposit to put towards that.

Seems like a bad idea to me. But, I'm curious to see if others have been doing this and how it has worked out.

[Brie Schmidt]

@Joey Nakayama I agree with @Jonathan Pliszka since I only manage my 6 here in Chicago I do a security deposit. The building we bought Jan 2013 had tenants in place and did a move in fee. Only 1 of 3 have left and they did clean when they moved, but they also backed into the garage too far knocking part of the frame off of the foundation. It cost me $300 to fix and with no security deposit the cost for me to go through the system to get my money wasn't worth it.

The other 2 with move in fees are moving out 5/31 so we will see what happens, but those are some of our best tenants so I doubt there will be problems.

[Joey Nakayama]

Good input, everyone. I agree that security deposits still make a lot of sense for smaller individual investors.

I plan to stick with security deposits for the time being. I have a unit available now, and I'm running a little experiment with it. I've listed it on Craigslist without specifying a security deposit or move in fee. When people respond to the ad, I'm going to see if interest diminishes after I let them know there will be a security deposit. If that happens consistently, maybe it's a sign that times are truly changing in the Chicago market. But right now I'd be very hesitant to rent to someone who sees a security deposit as a deal-breaker.

I found an interesting article on the issue in Chicago.

@John Weidner I have noticed craigslist ads in Chicago asking for a move-in fee in addition to last month's rent (but no security deposit). I haven't run across any Chicago ads asking for both a move-in fee AND security deposit.

For anyone on BP who has switched from security deposits to move-in fees, what has your experience been? (ease of renting units, damage after tenants leave, etc.)

[Mark Ainley]

We rent to mostly CHA tenants(section 8) in Chicago and love the "non refundable move in fee" which we have a totally separate lease from the ones we collect deposits on. We offer the tenants a choice and they always go with the $500 fee vs. the one months rent which our average rental rate is $1,080.00. With CHA tenants they do have the incentive to not destroy the place due to ramifications from CHA but we like the ability to use the move in fees as capital to work with which adds up. I have offered our lease up before to anyone that wants a copy to modify for their own so please always fee free to let me know.

The security deposits collected do need to be held in a "Iolta account" which is different then a plain checking account so keep that in mind when collecting deposits.

So to answer your question we do both to minimize our risk.

[Brie Schmidt]

@Joey Nakayama - Keep me informed about your experiment - I am going to start advertising for mine next week

[Joey Nakayama]

Will do @Brie Schmidt

So far, only two people have asked and both are still interested after learning about the security deposit. Not exactly statistically significant, but so far so good :)

I have several viewings lined up between now and this weekend. I'll let you know how it goes.

[Larry Smet]

Thanks for sharing your experiment @Joey Nakayama @Joey Nakayama

Like @Brie Schmidt mentioned, definitely keep us posted as you gather more info. I've been wondering about this exact topic over the last several months

Larry

[Bill S.]

@Brie Schmidt you can always bill the tenant for the damages. Some will actually pay it without you having to go through small claims court and collections.

[Eric S.]

I moved away from security deposits entirely about two years ago. Chicago makes it very difficult for investors to deal with deposits, including disclosures, receipts, transfers, interest, and deductions, and any mistakes along the way set the landlord up for a 2x penalty plus refund of the original amount plus attorney's fees. Also, in the case of a dispute, the tenant uses the security deposit as leverage whether there were any violations of the ordinance or not. The burden ends up on the landlord to prove that there weren't any violations.

I charge $500, but wouldn't recommend going any higher than that. If you do, the amount could be challenged by an attorney who may claim it was fee in name only, and because of the amount actually fit the definition of a security deposit. Because the courts are so tenant friendly, there is a good chance a judge would agree.

At lease signing, I disclose to the tenant that the procedure is to notify them of any damages upon move-out. If they don't pay or make payment arrangements, I turn the debt and supporting documents over to a collection agency that reports to all 3 credit bureaus. I keep close tabs on my units by doing several inspections a year, so I am not surprised when they move out.

I was involved in an eviction case 2 years ago in which the tenant's attorney argued that since the judge did not agree with certain deductions from the security deposit, that it was a violation of the ordinance and I should have to pay the penalties and attorney's fees, which would have added up to about 10k. The judge later ruled that was not the case, but it scared me enough to abandon the practice. Abandoning security deposits is certainly not ideal, but neither is the city of Chicago.

[Brie Schmidt]

@Bill S. - I could have taken them to court, but the fees did not outweigh the money spent, plus I got $50 increase in rent when they moved so I was not too disapointed.

[John Weidner]

@Eric S.

Good info. Do you go $500 per adult occupant or per unit?

What rental range would that be in?

[Jon K.]

I've never heard of move-in fees.

If I was a tenant, I wouldn't live in a place that had a move-in fee and deposit.

Why would a tenant clean up the place before they leave if they know there's no deposit to get back? No deposit means no incentive to clean the place up or cause damages. Not that they do an amazing job of cleaning, but at least some clean.

Changing locks? With quicksets, that costs about $20.

If I was the tenant, I would expect the rent that I was paying to cover that $20 key change, and "administrative" costs. Not a non-refundable move-in fee. I would expect the landlord to cover their costs with the rent that I'm paying, not charge me a non-refundable "move-in fee." Deposit, sure. Move-in fee, no.

It must be a regional thing. Move-in fees would never fly in my area. Ever.

[Eric S.]

I only charge $500 per unit and would discourage you from charging more.

In terms of getting a unit back clean, Chicago does not allow you to charge a tenant for what they call, "normal wear and tear." You can only charge for damages. If a tenant punches a hole in the wall, you can deduct for the hole, but the reasoning I've heard in court is that you would have to pay for painting the unit anyway, so you cannot charge for that.

The same reasoning applies to cleaning. You would have to clean the unit between tenants anyway, so you cannot charge the tenant for it. If a tenant appeals deductions and hires an attorney to get their money back, you will lose in most cases.

With every tenant, I try to get as many months up front as possible, plus the $500 move in fee. I apply that full amount to the rent up front. The MINIMUM I allow a tenant to move in with is two months rent. I subtract the move in fee and apply the rest of the balance to the rent on the front end of the lease.

All Chicago landlords need to read the entire RLTO and memorize it. Keep in mind that there are lawyers out there trolling for unsuspecting landlords who make very minor mistakes.

I rent single families with rent amounts between 1000-1700.

[Jonathan Pliszka]

Great stuff, @Eric S. Do you allow pets in your rentals? Thoughts on collecting say a non-refundable $250 per pet fee in addition to your $500 move-in fee?

[Tim Hoffman]

I moved from a deposit to a move-in fee about 18 months ago at the urging of my attorney. His point was that over 80% of all landlord-tenant lawsuits (initiated by the tenant) revolve around the security deposit. Eliminate that and you eliminate that risk.

I charge a move-in / cleaning fee of about 1/2 of the rent. $1200 rent is a $600 move in fee. $925 rent is a $450 move-in fee. My lease states in bold letters that the fee is non-refundable and any damages beyond normal wear and tear along with any excess cleaning will be billed to them. I inform them that as long as they leave the place in broom clean condition with no damages they will not be billed. I had a tenant go to the dollar store and buy some cheap cleaning supplies, attempted to clean and then wanted their full deposit back. This way, my cleaning crew cleans to my standards with no grief from a tenant.

As for holding a deposit over their head to return the unit clean, I have found that people do not change their behavior significantly regardless of the incentive. A pig will leave the place a pig stye if they are getting a deposit back or not and a clean person will leave it clean under the same circumstances. It is in their nature. Just think about you and what you would do. I'm not a phycologist but i am just saying.....

Use it to your benefit. I use this as a marketing tool. Assume you have a place to rent for $1,000/mo. My advertising would say something like, "NO DEPOSIT special, just a $500 move-in fee plus the first months rent" They only need $1,500 to move into my place. The competitor will say something like, "... $1,000 First months rent plus deposit to move in..." They need $2,000 to move into their place. Who's place do you think they will chose or which one of us will have the pick of the applicant litter? Just sayin'.

On those rare occasions where they ask about getting money back, I offer them the option of paying the move in fee OR paying a regular deposit equal to one months rent. When they move out, they will get the deposit back as long as the unit is in the same condition they received it. That means professionally clean the carpets, bathroom and kitchen are cleaned and sanitized, and so on. After that conversation, they always chose the move in fee.

Finally, on those occasions when the deposit was not returned in full, did the damages, fees, unpaid rent and so on cause you to file bankrupcy? Probably not. In reality, we are only talking about a few hundered dollars difference between a deposit and a move-in fee. Not the end of the world and if you use it as a marketing tool you get that back in better tenants and faster lease up time. What are you waiting for????

[Eric S.]

I would allow a small dog only. I don't do cats. I don't allow large agressive breeds because of the liability and insurance risk-it just isn't worth it.

Instead of charging a pet deposit, negotiate a higher rent. I lowered the price on a unit last month to $995, found a guy who really wanted it who had a small dog, and ended up signing a 2 year lease for $1100 with the dog.

Keep in mind that a lot of times, pets are being sneaked into your units. That's why it's so important to do at least 3 formal inspections a year.

[John Hauser]

I agree completely with @Eric S. . Security deposits have become such a minefield in Chicago that there was even a realtors' association that recently recommended that landlords do away with them. http://articles.chicagotribune.com/2014-01-24/classified/ct-mre-0126-podmolik-homefront-20140124_1_security-deposits-chicago-landlords-tenant-ordinance

All of the concerns about having a tenant not have an incentive to keep the place clean are well-founded. But even a non-paying tenant can use tiny errors in the security deposit rules to negate the amount they owe or even come out ahead. We do a move-in fee ($400 on an $850 place) and make it clear that the fee is non-refundable.

I like @Mark Ainley 's solution the best, of giving the tenants a choice. But Ive read the RLTO three or four times and I'm still not sure I could feel confident I know what to do, especially against a tenant lawyer who is looking for mistakes.

[Larry Smet]

Yes, and I've heard the rules keep changing from time to time @John Hauser, so you almost have to a be a full time Property Manager to stay on top of the rules if you want to go the security deposit route... or you can get nailed on a technicality and owe 3x the deposit. Not sure who came up with these crazy Chicago rules...

[Brie Schmidt]

I have some properties up for rent next month and we are going to give tenants the option. It will be interesting to see what happens - I started advertising them Sunday and will be showing Wed/Thu and hoping to get leases by Friday - I will let you know what they choose.

[Larry Smet]

Thanks @Brie Schmidt

What are the choices (meaning, the amounts) that you're giving your prospective tenants?

It'd be interesting if any landlords on the south side of Chicago can do the same experiment, since the type of tenant is going to be different... Do we have any takers?

[Mark Ainley]

On the southside they take the $500 non refundable move in fee all day. Only the older 55+ tenants elect to do security deposit. Just kind of old school minded. We leased one this week to a market tenant that was questionable so we told her she had to pay 1.5 months sec deposit. Every CHA tenant takes the $500 non refundable move in fee.

On the southside we generally have to paint plus put $400-$500 into the units no matter what so we work it into our numbers. Even if a tenant has a deposit and you hold it back for this or that they still run to an attorney saying you held it back wrongfully. We are where we are now with this process because I found myself giving back close to 100% of all deposits everytime out of fear so with move in fee we get $500 of instant working Capitol and lose a lot of liability.

The only thing security deposits are good for are tenants that skip out on a lease.

[Joey Nakayama]

The results of my experiment:

Of all the people who responded to my apartment ad, none were deterred by the security deposit. For context - $1050/mo 1br in Irving Park.

I also asked several people who came for viewings which they would choose - a standard security deposit or $400 move in fee. Every one of them chose the security deposit. One applicant even said he skips past ads as soon as he reads there's a move-in fee.

@Brie Schmidt interested to see if you have a similar experience with your experiment.