Please note that this post is an excerpt of the webinar hosted by our sister company, The Landlord Code, where our co-founders coach DIY landlords how to avoid problem tenants and maximize rental profitability. Get access to more training like this in our (free!) private Facebook group HERE.

Q: Has anyone had a tenant sign a lease, pay the deposit and then back out? Just not sure what my options are. For reference, this is in Oregon, Portland suburbs. –

Okay, that’s a good question, and I’ve had this happen to me a few times. So it’s a good question, and It actually needs a good answer because if you don’t get the good answer, what could happen? You can get sued or worse.

So Heidi, what were some of the answers that we got from these? – Okay, let’s run through a couple of these.

We have answer A, keep the deposit, send notice that the lease has been terminated. Bonus points if you can get it signed by them and find a new tenant. – Hey, you know what? That’s just money in the bank. I could see how someone would like that answer. Go on, next one. –

Okay B, I collect non-refundable holding fee when pre-leasing. Sign a non-refundable holding fee agreement when it’s collected – That’s not a bad way to go either. I mean, I could see why someone would want to do that. You know, keep that money, you want to keep people’s skin in the game. All right, what’s the next one? –

C, yes, and I keep the deposit. This is one reason to always cash the deposit check immediately. – There you go, you got to get to the bank, when that ink dries, cash that check baby, I could see why someone would want to do that too. –

Okay, then we have D, I keep the deposit, because per our documents, until the move in, it’s a non-refundable fee to hold the unit. – And there’s a couple more. – E, yes, and it’s non-refundable and

So you can see from these answers, these are answers from from people who also own rentals. So they’ve got three things in common. These answers came from landlords who own rentals, number one, number two, they all agree that it should be non-refundable. And number three they’re all wrong. All these answers are wrong. This is all bad information. I’m sorry, if you were to put, if you were on Jeopardy or a Family Feud, you would have lost, you would have lost this one. So the answer to this is, so what we know, we did a little bit of research, so in California, there’s no such thing as a non-refundable holding deposit. And you might say well that’s California, well guess what? It’s the same way in Oregon as well. There’s no such thing as a non-refundable holding deposit. So when people do try to do that, what they are doing is they’re setting themselves up for failure. And I dropped a story on this a couple of weeks ago and I’ll just share it with you again.

I rented a house to somebody, the guy loved the house, the owners were a little bit eccentric, they were a little bit overbearing. And the guy signed the lease, gave me money that I had in a broker trust account, this is when I worked for somebody else. And then he and the owners met, and after that meeting, he was so freaked out by the owners that he’d wanted to pull out. Well, in the meantime, the owner said, well, we have this lease out, it hasn’t been signed yet, but he gave us the money, and we’ve already made plans to move. And that money should be ours to pay for damages. And I was like, you know what? I don’t necessarily want to argue that point, but the reality is that California law says it’s different. This guy can pull out until the leased is signed, until he’s totally committed to this property, and it’s not refundable. So what we like to do in our office is when we sign a lease with somebody, we get the security deposit, and we get the first month’s lease and we have a lease in place. So now there’s a lease in place.

Now, if the tenant decides to break their lease, they’re already financially obligated to this contract. And what we do have to do in California, and I don’t know about Oregon, but what we have to do in California is we have a duty to mitigate damages, but we have the first month’s rent, and we have the security deposit. So until we release the property, we have rights to those funds. Once we lease the property, if there’s any money left over, if we’ve only used one month or half a month or two months, we have to refund the balance to the tenant. And that’s the same way I’m sure in Oregon, but I’d have to do my research. So what you need to take away from this question is that there’s actually in California and in Oregon, there’s no such thing as a non-refundable holding deposit. If someone applies for a property, and you want to have money for that property, you need to have them sign the lease document, until that lease document is signed, there’s no financial obligation from them, they just have given you some money to hold. But if they decide to pull out before that leased is signed, you need to give that money back. And I’m sorry, that’s the case, but those are the breaks, and that’s the way the law’s written.