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Who Holds the Security Deposit?

This post is an excerpt from the Denise Evans book, Alabama Landlord’s Desk Reference and Forms Book.
If you’d like more information, including free table of contents and index, there is a link at the end of the article.

Sometimes a landlord hires a property management company, but wants to hold all security deposits itself. Often, the property manager balks, and says that is not allowed. The answer is more complicated.

A property manager is the agent for the landlord/property owner. Unless the management contract has some different provision, then the manager must surrender the security deposit to the owner if it is demanded. Agents must comply with their principal’s instructions, unless those instructions are illegal or a contract between the parties dictates a different result. There is nothing illegal about the owner holding the security deposit money.

This typically comes up in three situations:

  1. Owner wants the deposit forfeited and manager disagrees.  Unless the management contract says the manager is the one who is allowed to make that decision, then the manager must declare the deposit forfeited. If that happens, ask the owner to sign an indemnification agreement saying that if the manager is sued because the deposit was not refunded, then the owner will pay all of the manager’s legal fees and other costs and expenses.
  2. Owner wants to change management companies, or self-manage. It does not want to declare the deposit forfeited, but it does want sole control over the money.  This has the same answer as #1 above.
  3. Owner wants the security deposit so it can use the money. It is allowed to do that in Alabama, but the funds must be available and refunded at lease end if there have been no deductions.  Obtain the same indemnity agreement as described in #1 above.

Property managers who want to avoid such situations should have a contract clause that says security deposits will be held only by the manager, that forfeiture decisions are in the sole discretion and control of manager, and that if there is a change in management companies the manager will refund security deposit by checks made jointly payable to the tenant and the new management company. That last item avoids the problem of the new management company failing to refund the deposit (but with no forfeiture-related reason) and the tenant is allowed to get the refund from the former company, under Alabama law. With my method, the tenant has ALREADY received the refund, even though jointly payable to the new management company.

Interested in the Landlord’s Desk Reference and Forms Book? Click HERE

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Question of the Week: Security Deposit Deductions

This question comes from a landlord in Birmingham. He is just starting out, and can’t afford to hire cleaning crews and repair people every time a tenant moves out. So, he does the cleaning himself, and makes simple repairs such as drywall damage, broken window panes, and similar things. Normally, he would have to pay someone $300 for an “extra” cleaning job, and several hundred dollars for his repairs. He asks, “When I deduct these things from a security deposit, do I have to charge an hourly fee for my time? If so, how much per hour? Or, can I deduct the same amounts that independent contractors would charge me?”

The answer is, he can deduct the same amounts that independent contractors would charge him. In the case of cleaning and repair deductions from security deposits, they are the result of damages the landlord suffered as a result of the tenant’s default regarding property maintenance. The measure of the damage, meaning the dollar amount of tenant’s liability, is what it would cost to fix things. Not what it actually costs, but what it would cost. People who want to read an appeals court decision discussing this should read Tabor v. Thacker, 521 So.2d 66 (Ala. Civ. App. 1988)

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Question of the Week: Ad Valorem Tax Values

The question this week comes from somebody in Jefferson County who just received the new tax appraisals for his rental properties, and went into shock!!! He was hoping they were worth as much as the county thought, but that was highly unlikely. It just meant his taxes were going to increase astronomically and unfairly. What could he do?

If this happens to you, be sure to dispute the valuation to the local Board of Equalization. Counties are not able to afford the personnel necessary to appraise properties by the old fashioned methods. Instead, they rely on computer software and artificial intelligence that makes educated guesses about values. Those guesses can be wildly wrong. It is fairly easy to attack them, but you have to be prepared.

First, don’t miss your deadlines, or you’ll be out of luck until next year. You have thirty calendar days from the date of the final published notice to dispute it, in writing. The Code sections explaining this process start at Section 40-3-20, Code of Alabama 1975.

Second, call the tax appraiser’s office and find out HOW their appraisal was done. Was it recent comparable sales, or was it replacement cost minus depreciation?

Third, be prepared for the hearing with all of your evidence. You will need to persuade the Board of Equalization that your property is worth less than the tax appraisal. For a comparables methodology, you will need information about recent comparable sales, and current competing properties in the market place. If at all possible, try to find sales within the last year, within a one- to three-mile radius and in the same community. For example, a property one block away from a Mountain Brook address, but actually in the Irondale city limits, would not be a legitimate comparable sale. If past sales were at higher prices, but there are very similar properties that remain unsold even though listed for those higher prices, (or even your tax appraised value) then that is very good evidence the value is lower. For replacement-cost-minus-depreciation, you will need information about the quality of the construction, and the current condition of the components.

Fourth, be prepared to dispute the evidence offered by the County attorney. They might have recent sales they say are comparable, but which are really not. You should bring your laptop computer and be able to access property information quickly. You cannot rely on wireless Internet. Make sure your cell phone is set up for mobile hot spot use, and know how to use it. Practice doing this, and looking up information on MLS, Zillow, or other sources. Or, they might say your building is better-built and still in better shape than reality.

Get to the hearing early. Ask the county’s attorney for a list of the properties they plan to use as comparable sales to support the appraised value. In the alternative, ask the for details regarding the base value of construction, and how they calculated a percentage of depreciation. That way, you can research them while the Board is getting settled in for the hearings. Hopefully you will not be the first one!

In my experience, they rarely give taxpayers the value they want, but usually do lower the values somewhat. If you are unhappy with the result, you can always appeal to Circuit Court. The legal fees to do that might be far more than the higher taxes, though. Even if your property is owned by an LLC or corporation, you can still be the advocate in the Board of Equalization. If you appeal to Circuit Court, though, you will have to hire a lawyer unless the property is titled in your own personal name.

We do not currently have a specific class or video on disputing your property tax valuation. You can always reach out via email, though, if you need to hire a consultant to help you prepare for your dispute.