Residential Security Deposits

BEFORE Rental/Lease:

What is a security deposit?
A security deposit is a payment, fee or deposit that a landlord collects from a tenant at the beginning of a lease or rental to compensate the landlord at the end of the term if the tenant (i) does not pay rent, (ii) damages the property, (iii) breaches the agreement or (iv) does not leave the property clean.

Is there a legal limit imposed on residential security deposits?
Yes. For an unfurnished unit, the maximum a landlord is permitted to collect in advance is the equivalent of two months’ rent. For furnished units, the landlord is permitted to collect up to three months’ rent.

May a landlord collect a cleaning fee or pet deposit or other amount in addition to a security deposit?
Regardless of how the security deposit is labeled (cleaning fee, pet deposit, last month’s rent or something else) or how it is divided into different categories, if at all, money that is used by the landlord to protect from financial or other damage is all considered a security deposit and falls within the above 2 or 3-month rent equivalent limits for unfurnished or furnished units.

May security deposit be made in multiple payments?
Yes, if allowed by the landlord. If all payments are due before the commencement date of the lease or rental, but have not been paid, the landlord may have the right to terminate the agreement.

DURING Rental/Lease:

May the security deposit be increased during the lease or rental term?
Yes, for a month-to-month rental, if proper notice is given and provided the overall amount stays within the 2 or 3- month rent equivalent legal limitation, and if no other restriction, such as rent control, applies. A landlord may use.

END of Rental/Lease:

What happens to the security deposit after the tenancy has terminated?
Within 21 days after the tenant vacates the property, the landlord is required to give the tenant a written statement identifying (i) the amount of security deposit received, (ii) the amount of security deposit spent, or anticipated will be spent, along with itemized statements for the expenditures, and (iii) the amount being returned to the tenant.

Is there anything a tenant can do to minimize potential reductions from the security deposit?
Yes, the tenant can clean the property and repair any damage arising during the tenancy. To help identify potential deductions from security deposit, the landlord is required to give the tenant a notice of a right to have an inspection prior to termination.

How do I Negotiate a Counter offer?


The preparation of a counteroffer allows you as the seller and your agent to take control of negotiations after a prospective buyer submits a purchase offer. Your agent, on receiving a prospective buyer’s offer, will review with you:

  • The terms offered and contingency provisions — conditions — which affect closing;
  • The likely net sales proceeds the offer will generate; and
  • Their knowledge about the profit tax liability you will likely incur on the sale when the property is not your primary residence.

A counteroffer is made when the terms and conditions of the buyer’s offer are for any reason unacceptable without a change. Your agent prepares your written counteroffer and reviews it with you before you sign it and your agent submits it to the buyer. Your signed counteroffer documents your intent to be bound by your offer to sell when the buyer accepts.

To counter a buyer’s unacceptable purchase offer, your agent may recommend that they:

  • Prepare your counteroffer on a new purchase agreement form;
  • Prepare your counteroffer on a counteroffer form;
  • Dictate escrow instructions based on terms and conditions orally negotiated with the buyer (or buyer’s agent);
  • Set up an auction environment by calling for the submission of all “best and final” offers in a multiple-offer situation; or
  • Orally advise the buyer’s agent about the changes they need to make before you will accept the buyer’s offer.

The buyer may agree to purchase your property on the terms stated in your counteroffer by merely signing the counteroffer and delivering it as accepted, or submit a counteroffer back to you for
further negotiations.

Senior, 55+ yo, Carry Forward

A: If you’re a California homeowner aged 55 or older, you have a once-in-a-lifetime right to sell your home and carry forward its current assessed
value to a replacement residence of equal or lesser value.

To qualify to carry forward the current assessed value:

  • You need to own and occupy the home sold as well as the replacement home;
  • Both homes must be eligible for the homeowner’s $7,000 property tax exemption;
  • You or your spouse must be at least 55 years old or severely and permanently disabled on the closing date of the sale of your old home;
  • You need to purchase (or construct) a replacement home of equal or lesser value than the home you sold
  • The replacement residence must be located:
    • In the same county as the property sold; or
    • Within another participating county; and
    • The purchase (or construction) of the replacement home needs to close (or construction completed) within two years before or after closing the sale of your old home.

When your replacement home is not within the same county as the home you sold, the county of your replacement property needs to be a participating county which allows the carry-forward assessment from your prior county.

Currently participating counties include Alameda, El Dorado, Los Angeles,
Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne and Ventura counties (subject to change).

Only one carry-forward assessment exemption is allowed per married couple. For example, if a married couple takes a carry-forward assessment exemption, and one spouse later dies, the surviving spouse may not take a carry-forward assessment exemption even if they later remarry.

When you and a co-owner both reside in the home and are not married, you both individually qualify for the carry-forward assessment. However, on the sale, only one of you may use the exemption.

Thus, the co-owner who does not apply for the exemption is precluded from any future use of the assessment carry-forward tax relief.

The only exception is when you become severely and permanently disabled after receiving the carryforward tax relief due to your age. In this case, you
may use the exemption a second time under a separate claim due to the disability.

Why should I care about LTV and FMV?

A: When you apply for a mortgage and consider your down payment options, you will come across two important terms:

• Loan-to-value ratio (LTV); and
• Fair market value (FMV).

Your LTV states the mortgage amount as a percentage of the property’s purchase price or FMV. The FMV is the price a reasonable, unpressured and informed buyer is willing to pay for similar property on the open market.

For example, consider the owner of a home with an FMV of $500,000. They owe $400,000 on their mortgage. Therefore, their LTV is 80% ($400,000 / $500,000).

Sometimes, a homeowner will owe more on their mortgage than their home’s current FMV. This is especially common during a recession, a period when prices drop. For instance, the owner of a home with an FMV of $500,000 who owes $600,000 on their mortgage has an LTV of 120%
($600,000 / $500,000). In this situation, the homeowner is underwater on their mortgage, their balance sheet now financially saddled with $100,000 in negative equity.

When an underwater homeowner needs to sell their home, they may either:

  • Take a loss on the sale by paying off the balance of their mortgage using “out-of-pocket” funds such as savings, if financially feasible; or
  • Under extenuating circumstances, negotiate a short sale with the lender, during which the lender accepts the net proceeds of the home sale in exchange for cancelling the unpaid mortgage balance.

Homeowners with effective negative equity are those who have an LTV just below 100% but, due to the lack of positive net equity, are unable to cover transaction costs, typically 7% of the home’s value.

The smaller the down payment a homebuyer makes, the more likely they are to slip into negative equity territory since home values often fluctuate. Further, when an appraisal comes in below the agreed-to selling price, the
lender will approve the mortgage based on the appraised value — the property’s FMV — and require the buyer put in the difference between the sales price and the FMV.

As an alternative, the sales price reduced its appraised value through negotiations with the seller. A homebuyer who overpays and makes a small down payment will likely be underwater immediately.

What is an Impound Account?

A: An impound account, also know as an escrow account, is a money reserve funded monthly by you to pay annual recurring ownership obligations together with payments of principal and interest (PI) through your mortgage payments.

The impound account is maintained by your lender to pay your annual property taxes and hazard insurance premium (TI).

Payment from an impound account ensures your lender’s security interest in your property will not be impaired by defaults in your payment of TI obligations.

An impound account is created when you agree to the terms of an impound account addendum attached to your lender’s trust deed. If not required at origination, you may request the lender set up an impound account when they provide this service.

An impound account provision establishes:

  • Monthly deposits to be paid in amounts based on your annual TI obligations;
  • Reserves initially deposited as prepaid installments when future monthly payments will be insufficient to cover TI obligations on their due dates; and
  • Interest to be paid to you by your lender on the impound account balance.

When you have an impound account, your lender will provide accounting, statements and analyses prepared and delivered to you at least once yearly. These will include itemizations of:

  • Surpluses when the balance is greater than necessary to satisfy TI disbursements and reserves, which are either returned to you or credited toward the next year’s impound account payments; or
  • Deficiencies and shortages, arising when the impound account balance is insufficient to pay upcoming TI obligations or the impound account has a negative balance after a TI payment.

The formulas for setting initial impound account deposits, monthly TI payments and limits on reserves for any mortgage are set by California law.
Impound accounts are also subject to some enforcement rules. A lender:

  • Is prohibited from requiring an impound account at origination on a first mortgage secured by an owner-occupied one-to-four unit residential property when the loan to value ratio is less than 90%; and
  • May demand and enforce the establishment of an
  • Impound account on a mortgage secured by a one to-four unit residential property when the owner is delinquent on two or more consecutive property tax payments.

Rules for terminating enforceable impound accounts vary based on the lender’s policies. Your lender is also required to pay 2% annual simple interest on any balance in the impound account.

For business mortgages, including carryback business mortgages, impound accounts are optional requirements for the mortgage holder, but are neither common nor compulsory.

A Buyers’ and Sellers’ Guide to Multiple Offer Negotiations

Information for Buyers

  • In some situations sellers will have several competing purchase offers to consider. Sellers have several ways to deal with multiple offers. Sellers can accept the “best” offer; they can inform all potential purchasers that other offers are “on the table”; they can “counter” one offer while putting the other offers to the side awaiting a decision on the counter-offer; or they can “counter” one offer and reject the others.
  • While the listing broker can offer suggestions and advice, decisions about how offers will be presented – and dealt with – are made by the seller – not by the listing broker.
  • There are advantages and disadvantages to the various negotiating strategies you can employ in multiple offer negotiations. A low initial offer may result in buying the property you desire for less than the listed price – or it may result in another buyer’s higher offer being accepted. On the other hand, a full price offer may result in paying more than the seller might have required. In some cases there can be several full price offers competing for the seller’s attention – and acceptance.
  • Your buyer-representative (agent) will explain and advise on the pros and cons of these (and possibly other) negotiating strategies. The final decision, however, is yours to make.
  • Purchase offers generally aren’t confidential. In some cases sellers may make other buyers aware that your offer is in hand, or even disclose details about your offer to another buyer in hope of convincing that buyer to make a “better” offer. In some cases sellers will instruct their listing broker to disclose an offer to other buyers on their behalf.
  • Listing brokers (the sellers representative) are required to follow lawful, ethical instructions from their clients in the same way that buyer-representatives must follow lawful, ethical instructions from their buyer-clients. While some REALTORS® may be reluctant to disclose terms of offers, even at the direction of their seller-clients, the Code of Ethics does not prohibit such disclosure. In some cases state law or real estate regulations may limit the ability of brokers to disclose the existence or terms of offers to third parties.
  • You may want to discuss with your buyer-representative the possibility of making your offer confidential, or of establishing a confidentiality agreement between yourself and the seller prior to commencing negotiations.
  • Realize that as a represented buyer, your broker likely has other buyer-clients, some of whom may be interested in the same properties as you are. Ask your broker how offers and counter-offers will be presented and negotiated if more than one of his buyer-clients are trying to buy the same property.
  • Appreciate that your buyer-representative’s advice is based on past experience and is no guarantee as to how any particular seller will act (or react) in a specific situation.

Information for Sellers

  • It’s possible you may be faced with multiple competing offers to purchase your property. Your listing broker can explain various negotiating strategies for you to consider. For example, you can accept the “best” offer; you can inform all potential purchasers that other offers are “on the table” and invite them to make their “best” offer; you can “counter” one offer while putting the other offers to the side awaiting a decision on your counter-offer; or you can “counter” one offer and reject the others.
  • If you have questions about the possibility of multiple offers and the way they can be dealt with, ask your listing broker to explain your options and alternatives.
  • Realize that each of these approaches has advantages and disadvantages. Patience may result in an even better offer being received; inviting buyers to make their “best” offers may produce an offer (or offers) better than those “on the table” – or may discourage buyers who feel they’ve already made a fair offer resulting in them breaking off negotiations to pursue other properties. Your listing broker will explain the pros and cons of these strategies (and possibly other) negotiating strategies. The decisions, however, are yours to make.
  • Appreciate that your listing broker’s advice is based on past experience and is no guarantee about how any particular buyer will act (or react) in a specific situation.

Information for Buyers and Sellers

Perhaps no situation facing buyers or sellers is more potentially frustrating or fraught with potential for misunderstanding and for missed opportunity than presenting and negotiating multiple, competing offers to purchase the same property. Consider the following issues and dynamics:

  • Sellers want to get the highest price and best terms for their property.
  • Buyers want to buy at the lowest price and on the most favorable terms.
  • Listing brokers – acting on behalf of sellers – represent sellers’ interests.
  • Buyer representatives represent the interests of their buyer-clients.
  • Will a seller disclosing information about one buyer’s offer make a second buyer more likely to make a full price offer? Or will that second buyer pursue a different property?
  • Will telling several buyers that each is being given a chance to make their “best offer” result in spirited competition for the seller’s property? Or will it result in the buyers looking elsewhere?
  • What’s fair? What’s honest? Why isn’t there a single, simple way to deal with multiple competing offers?

Knowledgeable buyers and sellers realize there are rarely simple answers to complex situations. But some fundamental principles can make negotiating multiple offers a little simpler.

  • Realize the listing broker represents the seller – and the seller’s interests, and the buyer-representative represents the buyer – and the buyer’s interests. Real estate professionals are subject to state real estate regulation and, if they are REALTORS®, to the Code of Ethics of the National Association of REALTORS®.
  • The Code of Ethics obligates REALTORS® to be honest with all parties; to present offers and counter-offers quickly and objectively; and to cooperate with other brokers. Cooperation involves sharing of relevant information.
  • Frequently frustration and misunderstanding results from cooperating brokers being unaware of the status of offers they have presented on behalf of their buyer-clients. Listing brokers should make reasonable efforts to keep buyer-representatives up-to-date on the status of offers. Similarly, buyer-representatives should keep listing brokers informed about the status of counter-offers their seller-clients have made.

Finally, buyers and sellers need to appreciate that in multiple offer situations only one offer will result in a sale, and the other buyers will often be disappointed their offers were not accepted. While little can be done to assuage that disappointment, fair and honest treatment throughout the offer and negotiation process, coupled with prompt, ongoing and open communication, can enhance the chances that all buyers – successful or not – will feel they were treated fairly and honestly.

What environmental hazards is a seller to disclose?

A: Environmental hazards are man-made hazards such as noxious or annoying conditions, not natural hazards that exist at the location of the property.

As environmental hazards, the conditions are classified as either:
• Injurious to the health of humans; or
• An interference with an individual’s sensitivities.

Environmental hazards are defects in a property affecting its use by humans. If known to a prospective buyer, the defects may affect a prospective buyer’s decision to purchase the property. Thus, the environmental conditions are material facts. When known to the seller or the agents participating in a transaction, environmental hazards are to be disclosed to prospective buyers since material facts adversely affect
the property’s value.

Environmental hazards located on the property which pose a direct health threat to occupants include:
• Asbestos-containing building materials;
• Carbon monoxide;
• Formaldehyde;
• Hazardous waste;
• Lead;
• Toxic mold; and
• Radon gas concentrations.

The seller’s agent conducts a visual inspection of the property for visible environmental hazards, as well as physical defects, before reviewing the seller-prepared Transfer Disclosure Statement (TDS) for correctness.

On review of the TDS, the agent enters on it any of their observations inconsistent with the seller’s entries to correct the TDS for seller errors or oversights. The TDS becomes one document in the marketing package used to induce buyers to acquire the property.

The timing for delivery of the TDS to prospective buyer as a disclosure is as soon as practicable (ASAP) after the buyer or their agent makes an inquiry seeking further information on the listed property, usually by delivery of a marketing package which includes the TDS.

Also, the seller’s agent delivers, or confirms the buyer’s agent has handed the prospective buyer a copy of the environmental hazard booklet approved by the California Department of Health and Safety (DHS).

The seller is not obligated to hire a third party to investigate and report on whether an environmental hazard is present on or about the property. It is the seller’s and the seller’s agent’s knowledge about hazardous environmental conditions affecting the property which is disclosed on the
TDS.

Will I pay taxes if I sell my home?

A: When you sell your primary residence, it is excluded from taxation up to $250,000 profit per individual owner when you qualify for the principal
residence profit exclusion. When you own your home with another person, together you may exclude up to $500,000.

To qualify for the exclusion, you need to have occupied the property as your principal residence for at least two of the last five years. When you own your home with another person, you both must be owners and meet the two-out-of-five year occupancy rule. If only one of you meets the occupancy rule, then the profit exclusion is limited to $250,000.

However, when you and your spouse have not simultaneously owned and occupied the residence for at least two of the last five years, you still qualify for the $500,000 exclusion if:

  • One of you owned the residence;
  • You both meet the two-out-of-five year occupancy rule;
  • You file a joint tax return for the year of the sale; and
  • Neither of you has taken a principal residence profit exclusion on another property within two years prior to the sale.

You do not need to occupy the home at the time of sale to qualify for the principal residence profit exclusion under the two-out-of-five year rule.
If you do not meet the two-out-of-five year occupancy rule, you do not qualify for the tax exclusion — with one exception. If you relocated due to personal difficulties, you may still qualify for a partial tax exclusion. Personal difficulties include:

  • A change in employment when your new job is located at least 50 miles farther from your home than your old place of employment or, if you were
  • Unemployed, the job is at least 50 miles away from your home;
  • A change in health, such as age-related infirmities, emotional issues or even severe allergies; and
  • Unforeseen circumstances, such as death, divorce or natural disasters.

With the personal difficulties exception, when you relocate after occupying the property for less than 24 months, you qualify for a profit exclusion
amount equal to the fraction of the ceiling amount ($250,000/$500,000) attributable to the portion of the 24 months you occupied the property.