Michigan Law and Security Deposits: A FAQ
Where does your security deposit go? What can it be used for? Learn it all here.
A security deposit is an amount of money taken from a prospective tenant and held in escrow until that tenant moves out. Many tenants believe that a security deposit is only used when they move out, and only used to make necessary repairs to the property before the next tenant moves in. At least in the State of Michigan, they are wrong: a security deposit is also the go-to pile of money to pay for any back rent or unpaid utility bills upon tenant Move-Out.
How Large Can a Security Deposit Be?
In Michigan — and in most states – there is a limit on the amount that can be charged for a security deposit. Michigan’s limit is one and a half times the amount of monthly rent. So if you’re paying $899/month in rent, you can charge up to $1348.50 in security deposit. Royal Rose Properties charges somewhere between 1 and 1.5 months’ rent in security deposits based on a variety of factors including the location and value of the property rented, the tenant’s qualifications, if there are pets, and more.
Many tenants misunderstand the term, “First & Last Month’s Rent” that’s used by many landlords when they advertise their rental properties. This is just a marketing term and the last month’s rent collected is legally considered a security deposit. Legally the term should be, “First Month’s Rent & Security Deposit”.
Who Owns the Money?
A landlord is required to place security deposits into an account and leave it there because they are technically still the tenant’s funds and the landlord is only allowed to have possession of them. This is called placing funds in escrow. In Michigan these funds are allowed to collect interest which can go to the landlord. Other states have different rules about interest on security deposits.
How Many of These Rules can be Changed in the Rental Agreement?
None. Michigan State law specifically forbids a landlord from creating a rental agreement that would waive any of the laws relevant to security deposits.
When Can a Security Deposit be Liquidated?
As mentioned above, a security deposit goes to pay for unpaid rent, unpaid utilities, and damages to the property — all at time of move-out. A tenant cannot use their security deposit to pay their rent if they intend to continue living in the rental; it is legally unavailable to the landlord until they are moving out. Even then, the landlord must be able to prove that the tenant has returned possession of the property and that there are unpaid bills or damage to the property to pay for before the landlord can liquidate the security deposit.
What can a Landlord Charge Against a Security Deposit?
In the case of unpaid rent or utility bills, it’s simple — they take out as much as a tenant owes. When it comes to paying for damages, it’s a bit more complex. When a tenant moves into a rental home, the landlord (in theory) is supposed to supply them with a Move-In Checklist on which the tenant can do two things:
- Take an inventory of everything in the home, and
- Made a list of any existing damages, no matter how small.
The tenant is then supposed to return this list to the landlord within a certain timeframe (seven days in Michigan). With this list, the landlord has a very solid record to rely on when they do a Move-Out Inspection. They will go through and look for every item on their inventory to make sure that it (or an item of equivalent purpose and value) is present, and they’ll go through their list of existing damage and note any and all new damage that they find. They’ll then take the list of new damages and calculate how much it will cost to repair all of it, and then they’ll subtract a reasonable amount to account for ‘normal wear and tear.’ Any amount left over legally can be deducted from the tenant’s security deposit. Michigan law does allow a tenant seven days to challenge any charges against their security deposit, but the tenant better have documentation to support any such challenge.
Keep in mind that if a tenant breaks a lease and moves out early, the unpaid portion of their lease may be considered unpaid rent and deducted from their security deposit — even if a tenant is current on everything else.
What Happens if Move-Out Charges Exceed the Security Deposit?
When all the past due rent, unpaid late fees, utilities and damages are totaled by the landlord and they exceed the amount of a tenant’s security deposit, the landlord typically will have to take the tenant to court. In Michigan, the landlord will typically go to small claims court to get a judgment against a tenant, if the damages are less than $5000. With a judgment in hand, the landlord is then legally allowed to garnish income and assets of the tenant.
Security deposits are a crucial part of tenancy. When turning over possession (not ownership) of their rental property to a tenant, they allow landlords some insurance that the tenant will be responsible, not only paying the rent and other association bills on time, but also taking care of the property so it maintains its value.