DEFINITION OF SECURITY DEPOSIT
The term "security deposit" refers to money or other valuable items given by a tenant to a landlord in conjunction with renting property and can include damage deposits, advance rent deposits, and some pet deposits. If the landlord charges the tenant a nonrefundable fee such as a cleaning fee or a pet fee, the nonrefundable fee is not part of the security deposit. The security deposit protects the landlord against losses from default in rent payment and from losses due to the tenant's negligent behavior in relation to the landlord's property. Security deposits are not a source of funds for the repair of damages to the property that result from normal wear and tear.
Typically, the security deposit is a fund established by the tenant to guarantee faithful performance of the tenant’s obligations incurred under the lease with regard to the property and to mitigate any losses by the landlord. This interpretation entitles the tenant to a return of the security deposit at the end of the lease if the tenant meets their obligations. If no damages occur due to negligence by the tenant, the tenant receives the entire deposit. Disagreement can arise, however, about what is damage resulting from negligent behavior and what is normal wear and tear. For example, wear and fraying of carpeting may be a consequence of normal wear and tear, whereas rips and discoloration from spills may be the result of the tenant's negligent behavior. The "move-in, move-out inspection form" can head off potential disputes over responsibility for damages to the property.
ESCROW ACCOUNTS FOR SECURITY DEPOSITS
Under Georgia law if a person individually or collectively owns with his or her spouse and/or minor children more than ten residential rental units, the Georgia law has stringent requirements for collecting and handling security deposits. When the landlord owns more than ten units, the landlord must place all security deposits in an escrow account to hold them in trust for the tenants during the tenancy. These requirements also apply whenever third persons (agents) manage rental property for a fee, whether or not the owner owns more than ten units.
MOVE IN AND MOVE OUT INSPECTIONS
Move In: Before accepting a security deposit on residential property, the landlord must give the tenant a list of all existing damages to the premises and allow the tenant to inspect the premises to ensure the accuracy of the list. In practice, most brokers give tenants a GAR move-in, move-out inspection form for the tenant to fill out. Once the tenant and landlord agree upon the condition of the items listed on the form, both must sign it; and it serves as evidence of all known defects to the property at the beginning of the lease. If the tenant refuses to sign the list, the tenant must state specifically in writing the items on the list to which he or she dissents and sign such statement of dissent.
Move Out: Within three days after the date of the termination of occupancy, the landlord must (a) use the original inspection list to determine if any additional damage has occurred during the tenancy; (b) determine the estimated dollar value of such damage to charge against the tenant's security deposit; and (c) notify the tenant in writing. The tenant has the right to inspect the property within five business days after the termination of occupancy in order to ascertain the accuracy of the list of damages. Both parties sign a statement indicating their agreement on the final damage assessment. If they cannot come to an agreement over the damages, the tenant must specifically state in writing the items on the landlord's list to which he or she dissents and must sign that statement of dissent. If the tenant vacates the property without notifying the landlord, the landlord's final inspection may come within three days after the landlord discovers the termination of the occupancy.
Treble Damages Possible: When the parties cannot come to an agreement over the damages, then the tenant may institute a legal action in any court of competent jurisdiction against the landlord for the amount of the security deposit that the tenant believes was wrongfully withheld. If the tenant prevails, the landlord can be liable for up to three times the improperly held deposit plus attorney's fees.
RETURN OF RESIDENTIAL SECURITY DEPOSITS
The landlord must return the security deposit within thirty days after the termination of the rental agreement or the surrender and acceptance of the premises, whichever occurs later. A landlord may not withhold a security deposit for ordinary wear and tear of the premises. If the landlord retains any portion of the security deposit, the landlord must provide the tenant with a written statement listing the exact reasons for doing so. If the landlord retains the deposit to pay for repairs of damages to the premises, the landlord must list the damages. Upon delivering the written statement to the tenant, the landlord must accompany it with a payment of the difference between any sum deposited and the amount retained. The landlord may mail the statement and any payment required to the last known address of the tenant by first class mail. If the letter containing the payment is returned to the landlord undelivered and the landlord is unable to locate the tenant after reasonable effort, the payment will become the property of the landlord ninety days after mailing.
In addition to compensation for damages, the landlord may also lawfully retain amounts from the security deposit for mitigating damages caused by nonpayment of rent or of fees for late payment, unpaid utility charges, cleaning charges, or other damages caused by a tenant's breach of contract. The landlord must give notice to the tenant and use the funds specifically for those purposes. If the landlord fails to return the security deposit or fails to comply with the special legal requirements, the landlord forfeits all rights to retain any of the funds in escrow, forfeits the right to sue the tenant for damages to the premises, and can become liable to the tenant for three times the amount withheld plus reasonable attorney's fees.
If the damages to the property exceed the amount of the security deposit, the property owner can sue the tenant for the additional funds to fix the damage. Unpaid rent amounts and late fees can be included in this suit.
If a financing contingency has ended without a Buyer terminating, the GAR Conventional Finance Contingency VA and FHA exhibits all give the Seller the right to demand evidence confirming the Buyer has funds or a loan commitment to close. After a demand by the Seller, the Buyer has 7 days to provide evidence of ability to close. If the evidence is not provided, the Seller can notify the Buyer that the Buyer is in breach. The Buyer then has a 3-day cure period. Absent a cure, the Seller can terminate the contract.
This is an important protection for the Seller. First, Sellers generally need to move. Many are reluctant to start the moving process without assurance that the sale is moving forward. Second, the Seller really doesn’t have another way to protect himself if the buyer isn’t showing signs of progress toward closing. In this extraordinary market, buyers do extraordinary things. Holding a property off the market and risking a loss of earnest money is, unfortunately, a possibility.
Types of Evidence of Ability to Close
What if there is no Finance Contingency?
In this hot Seller’s market, buyers are waiving their right to a finance contingency. Often, the finance contingency is still included with the contract, but with zero days in the finance contingency. Therefore, the Seller’s right to demand evidence of ability to close and the right to terminate are in place. However, if there is no finance contingency at all, it is important to include an All Cash Sale exhibit in the contract. The All Cash Sale exhibit includes a verification of funds by the Buyer and the right of the Seller to terminate if the Source of Funds evidence is not sufficient or timely. Sometimes we see a simple Special Stipulation that the sale will be all cash, with neither a finance contingency nor an All Cash Sale exhibit included. Unless there is an anticipatory breach by the Buyer, the Seller has no way to terminate prior to closing day, if he is not satisfied that the Buyer has the funds to move forward.
A person who has been given a Power of Attorney (“POA”) may execute a Purchase Agreement for the sale or purchase of real estate, so long as very specific required conditions are met.
The grantor of the POA is referred to as the Principal. The grantee of the POA is referred to as a Representative or agent. The POA may be recorded, but it is not required.
The GAR Purchase and Sale Agreement, exhibits and amendments allow buyers and sellers to refine the terms of their agreement. The Due Diligence Period (DDP), the Buyers’ Right to Inspect, the Right to Request Repairs (RRR) and the Amendment to Address Concerns are all tools that are used to come to an agreement between the parties. If the parties cannot agree, they are also tools that allow termination of the contract.
Important Points to Remember about how these different tools operate:
Due Diligence Period and Amendment to Address Concerns
The Due Diligence Period is located in the main body of the contract on page 1, paragraph 8 and is further explained on pages 3 and 4. The Due Diligence Period can be analogized to an option period. Within the Due Diligence Period, the buyer may decide to proceed or not proceed with the purchase of the Property for any or no reason. Any negotiation of repairs that come up in an inspection are done during the Due Diligence Period. The buyer delivers its repair terms on the Amendment to Address Concerns (ATAC F704). The seller can agree to the terms, can reject the terms or the terms can be negotiated, but there must be agreement prior to the end of the Due Diligence Period or the buyer can find itself buying “as is.” That is, if there is no agreement between the parties regarding the terms of the ATAC and the buyer has not terminated the agreement, then the buyer has accepted the property “as is.”
Unilateral Notice To Terminate Purchase and Sale Agreement and Proposed Disbursement of Earnest Money
Alternatively, if the buyer decides not to proceed, either because they have decided against the house or terms of the ATAC cannot be agreed, the Buyer must send a notice to terminate to the seller. Usually, it is sent using a Unilateral Notice To Terminate Purchase and Sale Agreement and Proposed Disbursement of Earnest Money (F522). However, some agents play it safe and include a Notice of Termination within the ATAC in the event that the Buyer and Seller do not agree. Although the Buyer has the right to terminate unilaterally, both parties must agree to the disbursement of earnest money. Usually, if a termination is during the Due diligence period, it’s not an issue and the seller signs off on a return of earnest money to the buyer. However, if the parties cannot agree to disbursement, then the Holder of the earnest money joins the action by sending a “10-Day Letter” to all parties. A 10-Day Letter is a reasonable interpretation of the contract as to who is to receive the earnest money. The process is explained in detail in the Purchase and Sale Agreement, page 3 paragraph 7.
If a buyer is denied a loan, based on the loan described in the contingency, the buyer must 1) notify the Seller within the contingency time period AND must 2) provide the Seller with a Loan Denial Letter within seven (7) days from the date of notice.
A Loan Denial Letter must be for the Loan(s) described in the Finance Contingency. A buyer may also apply for different conventional loans, however, the denial of such other loans is not be a basis for a buyer to terminate. If there was an approved lender, the letter must be from the Approved Lender.
The Loan Denial Letter may be provided to Seller after the Financing Contingency Period has ended, if the seven (7) day period to provide the Loan Denial Letter falls outside of the Financing Contingency Period. The reason for the additional 7-day period to produce the Loan Denial Letter is because lenders may not be timely. It may take days for the lender to produce the letter. If, however, the lender does not produce the letter within the 7-day period, the finance contingency is completed and cannot be relied on to terminate. In effect, the sale becomes a “no financing” sale and the buyer’s earnest money is at risk.
In this very hot seller’s market, buyers are doing everything they can to be the winning bid in multiple offer situations. It is now very common to see buyers waiving the finance contingency and agreeing to pay a purchase price above the appraised price.
Avoid extra steps and stress. Consider the following appraisal and price issues:
by Mark Moore with Fairway Mortgage
The “appraisal gap” as it’s becoming known, is a real issue with the lack of homes and so many buyers. Multiple offers are commonplace and so are bidding wars. Even good appraisers who know the market and understand the actual definition of fair market value are struggling to come up with comparable sales that meet the criteria of the agencies (Fannie, Freddie, FHA, etc).
Now more than ever, current market data provided to the appraisers can help. Be sure you have copies available of the multiple offers on your listings, and let the lender know that you have them and are willing to provide to the appraiser. Also, any recent market information you have that the appraiser might not know about can help. For example, do the realtors involved know of a similar property that has just closed in the last week or is scheduled to close just before the subject property? If so, providing that information is another way to help appraisers get the value in this tough market.
Fairway uses a very small rotations of quality appraisers in each area of town. We attempt to provide enough work to those appraisers to become important to them. They are a very important part of our team and critical to our success and are graded on accuracy, timeliness, and other factors to determine which appraisers make it into our “elite rotation”. As a result, we have had very few appraisal issues during this market, and we have become the “bailout” lender for many of the big banks, credit unions, and internet lenders who do not use such a strategy.
However, with the market pressures (everyone asking for faster and faster appraisal contingencies) this can sometimes force us off the elite panel and into a less trusted group of appraisers to meet the ever-shortening time frames. If you have a good offer, with a solid local lender, encourage your sellers to give that lender time to get a quality appraiser out to the property. It will create much less stress and hassle down the road! Faster isn’t always better!!
If you have further questions about this or anything else, we are happy to assist.
Low inventory has been driving multiple-offer situations and bidding wars.
If the perfect house is already under agreement, your Buyer may want to secure a position by using a back-up offer.
GAR Forms has the situation covered by submitting the basic Purchase and Sale Agreement and including a Back-Up Agreement Contingency (F604) as an Exhibit. If the agreement is accepted by the Seller with the Back-Up Agreement Contingency Exhibit included, it becomes a Binding Agreement – in second position.
From the Seller’s standpoint, there are good reasons to accept a back-up, especially if the price and terms are better than the first agreement. From the Buyer’s standpoint, there are considerations. The back-up Buyer may need to increase the price or be flexible on terms to be accepted as a back-up. Further, a back-up can work against the second Buyer by elevating the primary’s motivation to make the deal work, so the Primary buyer may be more likely to forgive inspection issues and be more cooperative in Seller negotiations.
All things considered, the Buyer’s risk is moderated by protections built into the GAR back-up contingency exhibit.
The back-up Buyer is not locked in until they become Primary..
Multiple Back-up Agreements
If there are multiple back-up agreements, the order that the Seller signed the agreements would be the order in which they are entitled to become primary. Later offers would, of course, most often be at higher prices. This would to entice the Seller to sign a backup offer instead of putting the home back on the market if the first sale failed.
Earnest Money Deposits
The timing of the earnest money deposit is a negotiable term. If your Buyer does not want to deposit earnest money until the agreement becomes primary, write it that way. But if the Agreement is written that the earnest money is due upon binding (or days after binding) agreement, then it must be paid that way. An accepted agreement, even one with a back-up contingency, is a binding agreement.
Note: Delaying payment of earnest money could be interpreted by the Seller as a negative strike against a Buyer. Something to consider.
The Binding Date Changes Upon Delivery of Notice of Primary Agreement Termination
Time limits for a secondary agreement that has become the primary agreement start on the date that the Seller sends Notice of the Termination of the Primary Agreement.
The new Primary Buyer still has the right to conduct its due diligence or fulfill other contingencies. If the changes to the contingency periods or the Due Diligence period overlap the closing date, then the new closing date is extended to seven (7) days from the last date Buyer has to fulfill Buyer’s contingencies or the end of any Due Diligence Period, whichever is later. (F604#5)
Hope this helps!
Fair Housing testers are out in Metro Atlanta. Although you may have attended many Fair Housing seminars and think you know the ins and outs of staying compliant, you can get caught in an innocent situation and be found liable for a fair housing violation.
The Department of Justice brings suit on behalf of the United States to enforce the Fair Housing Act. The Georgia Commission on Equal Opportunity determines violations of the Georgia Fair Housing Act. Suit can be brought by either or both for Fair Housing Violations.
There are multiple ways to get caught in the Fair Housing net. One is through Fair Housing Testers and another is having a complaint filed by protected class members that think they have been treated unfairly.
The Testing Process
Fair housing testing is a strategy used to determine whether people looking for housing are being treated differently, based on their membership in a protected class. Testers are looking for differences in the quality, content, and quantity of information and services provided to seekers of apartments and houses.
The testing process often begins when an individual with a protected characteristic (e.g., race or national origin) files a complaint with a private fair housing advocacy organization that he or she has been treated unfairly. The process can also be random, without a complainant initiating it.
The characteristics that are most commonly the subject of testing are race, disability, familial status, and national origin. To determine if discrimination played a part in an applicant’s rejection or in the treatment the individual received, the advocacy group, many of which are funded by HUD, will send a “comparable” person to inquire about renting a unit at the same complex or purchasing a home from the same sales agent.
A testing method that is currently being used in Atlanta involves using 3 different callers to the same agent. One is African American, another Hispanic and the third Caucasian. All ask the agent if the property is available. All ask for more information. If the agent tells one caller about the community amenities, but doesn’t tell the others, a flag is raised as possible evidence of discrimination. If an agent requires a pre-qualification from one, but not others, a flag is raised. If an agent spends more time on a call with one caller, a flag is raised.
Sales agents do not use set scripts. An agent may have more time to talk or may not have any time. Although the 3-caller method is supposed to be fair, maybe it’s not, but it is being used. The key is to be consistent in that initial call. Ask consistent questions. Give consistent information. Be available for a follow up call or appointment. Don’t give the impression that you’re too busy for a call. That call may just be a tester looking for red flags!
Recently, an RMAA agent was accused of a Fair Housing violation by an applicant for a rental. The Complainant was treated the same way that the eventual tenant was treated. The home was presented to both in the same way, with private appointments. Both were sent applications for rent, including income and credit checks. A third-party verification database was used to process and assess the rentability of each applicant. The Complainant was informed that there was another application in process for rental of the house. Both applicants were considered at the same time. The eventual renter had a slightly higher credit score, although both were more than adequate. The Complainant’s third-party report suggested that the income may not be as high as stated in the application. The Caucasian applicant got the house. The African American applicant filed a complaint with the Georgia Commission on Equal Opportunity, stating that she was denied based on race.
Fortunately, the Complaint was found to have “No Reasonable Cause” for a violation. Evidence of equal treatment of the 2 applicants and the superior third-party report were important factors.
To prevail under the Georgia Statute, the Complainant must show that:
To prevail under the Georgia Statute, the Complainant must show that:
If there are previous listing brokers or buyer brokers that represented a prospect that wants to be your client, what are your responsibilities?
These situations come up daily. A seller or a buyer wants to change agents and calls you. Or a buyer is referred to you, but the buyer had been looking at houses with another agent. Or you want to list a property that has been listed by another broker.
Be very careful. You could be violating both Georgia law and the NAR Code of Ethics. Each carries its own consequences.
If there is an active written agreement with another broker and the prospect, you have to honor that agreement and back away until you are certain that no active agreement exists. Even if a brokerage agreement has expired, there may still be a protection period that has to be honored.
These rules need to be top of mind: