Earnest Money Deposits . . . A Trap for the Uneducated Landlord

An earnest money deposit is defined as "the total of any payments or deposits . . . given by a prospective tenant to a landlord in return for the option of entering into a rental agreement in the future, or for having a rental agreement considered by a landlord."

The applicable section of the Administrative Code that deals with earnest money is ATCP 134.05 (1) and (2) and (3).

I personally am not a big fan of collecting earnest money deposits from rental applicants.

The main reason is because ATCP 134.05 puts too many restrictions on these deposits in order to eliminate potential abuse by landlords. Failure to abide by the timelines regarding earnest money deposits opens a landlord up to being sued by the applicant for double damages (double the amount of the earnest money deposit) and attorney's fees.

A second reason I do not prefer earnest money deposits is because -- for a part-time landlord like myself -- it forces me to rush through the screening process. ATCP 134.05(2)(a)3 requires me to approve a person's rental application by the 3rd business day after taking an earnest money deposit (or else jump through a bunch of hoops and get written consent from the applicant to hold the earnest money deposit for a longer period of time).

It's not that I intentionally want to hold onto an applicant's earnest money deposit if I am not going to approve them, but rather sometime things happen that prevent me from completing the screening process within 3 days . . . say an emergency at my full-time job, a personal emergency, or the applicant's past landlord reference failing to return my call timely.

I just do not want to be on the wrong side of a lawsuit for double damages and attorney's fees because I couldn't keep up with a government prescribed timeline of when I should be able to complete the screening process.

Additionally, even if you approve an applicant, and offer them a lease, and the tenant changes his mind and opts not to sign the lease -- that doesn't mean you can automatically keep the earnest money deposit . . . . watch the video and you will learn what I mean.

Earnest money deposits are a tricky "animal" with little "upside" (in my opinion) and lots of "downside." If you require applicants to make an earnest money deposit or are thinking about it -- make sure you educate yourself -- or else you shouldn't be accepting them.

P.S. - No, a credit check fee is not considered to be an earnest money deposit.