The impact of limiting security deposits

We are a small-time landlord with just 3 single-family homes in the Bay Area. We live out of state but we stay up to date on all the law changes thanks to your blogs and articles.  Recently I saw a news item about California AB 12, limiting the security deposits allowed to be collected in California.  The Governor is supposed to sign it soon and become law next year.  

Given how expensive it is to repair damage, especially for smaller mom-and-pop landlords who don’t have regular maintenance crews available, I am curious about how you see this affecting the rental market.  I also read there is a carve-out for smaller landlords to be exempt from this law, but I think we have one door too many to qualify. 

The bill may have unintended consequences for lawmakers. The whole intent of AB 12 was to remove “barriers to housing access and affordability”, but it may turn out that the bill creates new impediments for prospective tenants who cannot survive a more rigorous vetting process when applying for a rental.

We understand the appeal of limiting security deposits, which oftentimes are budget-busting for renters in the market who are good people and are excellent rental candidates, but let’s remember the purpose of security deposits. It is to give a cushion to the landlord for the potential of harm to the property and unpaid rent.

Evaluating a rental candidate is one of the risk assessments. How likely is the prospective tenant to pay the rent and keep the unit in good condition? Housing providers are always attempting to do this calculus, and AB 12 raises the bar. Let’s say a prospective tenant is marginal - they had some question marks in their background - but has nonetheless sailed through the rental application process until now because an open-minded landlord gives the rental applicant the benefit of the doubt. With the new law, the same tenant will be put under greater scrutiny and may have their application denied.


Risk-averse landlords will only raise their criteria in selecting a tenant and thus, there is a large pool of applicants who will be excluded from housing they seek.


We have always stressed the importance for landlords to do their due diligence in the proper selection of tenants. From our hard-won experience, the biggest predictor of dysfunction is prior acts of dysfunction, and it takes some old-fashioned personal sleuthing to get a glimpse into the applicant’s rental history. Technology is no panacea.

There are wonderful tools that can give you a snapshot of the tenant applying for a unit, but keep in mind that judgments and other blemishes can be concealed, criminal backgrounds may be off limits, and housing providers can otherwise wear a blindfold when it comes to rental risks.

With the limitations of technology to expose risks, it is imperative that landlords ask for references from previous landlords, with the simple question of, “Would you rent to them again?”

You would seem to be correct in saying that you would not qualify for an exemption from AB 12.

AB 12 applies to landlords who hold the property as a “natural person,” an LLC in which all members are natural persons or a family trust, and the landlord must not own more than two residential rental properties that collectively include no more than four dwelling units offered for rent. This is part of the antipathy for larger landlords - dubbed “greed-fueled speculators.”