Hi Desert Real Estate Forum

With the continued decrease in home prices, more and more potential sellers are resorting to renting their properties in attempt to mitigate their losses while waiting for market to rebound. For homeowners that are currently managing their own rental properties or for those who may be contemplating the move to landlord I have prepared a brief overview of security deposit handling. All information covered here has been taken from California Civil Code Section 1950.5

What is Security deposit? According to the Civil Code “Security” means payment, fee, deposit or charge, including but not limited to, any payment, fee, deposit, or charge that is imposed at the beginning of the tenancy to be used to reimburse the landlord for costs associated with processing a new tenant or that is imposed as an advance payment of rent used to remedy tenant default or to repair damages to premises.

How much security deposit can be required of a tenant? The answer to that depends on the type of unit being rented. If the rental unit is unfurnished then no more than an amount equal to 2 months rent may be retained. If the unit is furnished then the amount is no more than 3 months rent.

What can the security deposit be used for? There are many items that the security deposit can be used for, they include but are not limited to:

-Compensation of landlord for a tenant’s default in payment of rent.

-Repair of damages to premises caused by tenant or tenant’s guests. This DOES NOT include normal wear and tear during the tenancy.

-Cleaning the premises to return it to the same condition it was in the tenant took possession.

There are obviously more items on this list but these are the most common items deducted for the tenants security deposit.

What is the procedure for checking a tenant out, and returning their security deposit? Within a reasonable time after notification of either party’s interest in terminating the lease the landlord must notify the tenant in writing of their option to request an initial inspection of the property and the tenant’s right to be present at said inspection. This inspection is to occur at a mutually agreed upon time no sooner than 14 days prior to termination. The purpose of this inspection is to identify for the tenant discrepancies that will result in security deposit deductions at termination if not repaired/remedied. Once the inspection option has been elected by the tenant the landlord is required to give the tenant 48 hour written notice of the inspection (unless mutually waived at the time of inspection election by tenant).

Following the inspection the landlord must deliver to the tenant an itemized statement outlining cleaning, repairs, etc that are proposed to be the basis of security deposit deduction. This statement must be left with the tenant (if present at the inspection) or left inside the premises. The tenant then has the remaining time of the tenancy to remedy the deficiencies.

Note: items not visible at the time of inspection or damages occurring after the inspection are deductible by the landlord (for instance a stain under a couch would still have to be cleaned by tenant or the landlord could deduct for the damage).

What is the procedure for returning funds to the tenant? Within 21 days of termination the landlord is required to deliver to the tenant an itemized statement indicating the basis for and the amount of, any security received and the disposition of the security and shall return any remaining portion of the security to the tenant. Along with this itemized statement the landlord must also include copies of documents showing the charges incurred and deducted by the landlord for repair and cleaning of the premises. The type of document required differs depending on who does the work.

If all repairs cannot be completed in 21 days, the landlord may deduct the amount of a good faith estimate of the charges that will be incurred and provide that estimate with the itemized statement. Following completion of the repair the landlord must complete the requirements in the above paragraph within 14 days.

Keep in mind that this is a “brief” overview of the civil code which has numerous subsections and refers to at least 10 of codes and ordinances. There are exceptions to everything, so if you are a landlord or tenant and have further questions, you can consult the civil code by accessing http://www.leginfo.ca.gov/calaw.html or by contacting your attorney.

A team of economists who created a variety of forecasting models concludes that predictions of further large housing price declines are greatly overblown.

They point to the house price index of the Office of Federal Housing Enterprise as most reflective of reality. Its data reveals that only four states — Arizona, California, Florida, and Nevada — have had declines of more than 4 percent in home prices over the past year.

These economists, including professors from Columbia University and from the Center for Real Estate at Wichita State University in Kansas, discount more drastic figures from the Standard & Poor's/Case-Shiller housing price index. They say this index is faulty because it doesn’t include data from 13 states and offers only partial coverage of 29 others, making its results an inaccurate reflection of middle-market homeownership.

Using a model constructed from the OFHEO price index, foreclosures, home sales, permits and employment, the economic team concluded that declines in house prices are highly likely to remain small.

“Our analysis reveals, unsurprisingly, that foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of collapsing prices. Our models predict that as foreclosures continue to climb in many states, house prices will remain flat or decline in those states — but will not collapse.

“One reason for this is that the effect of foreclosure shocks on house prices is small. Furthermore, other fundamental factors (such as employment growth and a slowing of the growth of the housing supply over the past year and a half) will cushion the impact of foreclosures,” the economic team said.

Source: The Washington Post, Charles W. Calomiris, Stanley D. Longhofer and William Miles (08/04/08)

"Copyright National Association of REALTORS®, Reprinted from REALTOR.org with permission."

Former Federal Reserve officials and economists believe the central bank will hold short-term interest rates steady at least in August and September and that rates likely will not be raised until early 2009.

Recent reports on inflation have been dismal, but the central bank has also taken a tough stance in its language of late. The financial markets are more of a concern because of the problems at Fannie Mae and Freddie Mac, and the housing slump and tight credit conditions remain key economic issues for the Fed, analysts say.

"They need to see financial markets settled, some good growth numbers, or good employment numbers," says Mike Moran, chief economist at Daiwa Securities International in New York.

Source: MarketWatch, Greg Robb (07/28/08)

"Copyright National Association of REALTORS®, Reprinted from REALTOR.org with permission."