Holding Deposits: What You Need To Know

Renting a property can be a competitive game, but putting down a holding deposit can help tenants secure the properties they want. They’re similar to a deposit one can put down in a retail scenario, where you ask the cashier to reserve an item so that no one else takes it. 

Holding deposits in the rental market is similar. They effectively secure a property for tenants so that no one else can rent it out. In this post, we’ll take a look at everything you need to know about holding deposits and how to handle them.

What is a holding deposit?

In the rental world, holding deposits secure a property a tenant likes so that no one else gets to rent it. If landlords have the option for tenants to put a holding deposit down, this is a good sign for keen renters. They effectively act as a promise by the tenants to rent the property, which is also great for the landlords, as it means that their property becomes occupied, and the hunt for new tenants is over. It’s important to note that a holding deposit and a security deposit are two different things and should not be thought of interchangeably.

What's the difference between a security deposit and a holding deposit?

Most people are familiar with the concept of security deposits, but it’s vital to understand the difference between your security deposit and your holding deposit. To make it easier, we’ve broken it down below.

Security Deposits

Most importantly, security deposits are refundable. This means they are returned to the tenant at the end of a lease, provided that there is no severe damage to the property once their tenancy period ends. Security deposits are also a lot more binding than holding deposits. Once the tenant pays the security deposit after signing the lease, the property is theirs for rent. The following payments made to the landlord thereafter are the monthly rental charges.

Holding Deposits

On the other hand, holding deposits will secure the property for tenants for a short-term period, which is usually between one and two weeks. Although the holding deposit is also usually refundable, it is typically deducted from the security deposit or the first month’s rent when those funds are due. Whereas a security deposit commits a tenant to lease a rental unit, a holding deposit does not. 

Holding deposits are also paid before any lease agreements are signed, allowing tenants some flexibility in making their final decision. However, there should be a separate holding deposit agreement in pace before the renter transfers any funds to the landlord or agent.

How long does a holding deposit last for?

Different landlords will have different terms and conditions in place when it comes to their holding deposits. However, when prospective tenants put a holding deposit down, it usually secures the property for a few weeks before the landlord can start advertising the rental unit to others. The length of time a holding deposit is valid depends on the landlord's preference. This duration should be clearly stipulated in the holding deposit agreement. 

How much should one be?

Holding deposits are much less than security deposits and usually range between $100 and $400, depending on the type of property in question. Although landlords should consider the interested parties as tenants once a holding deposit is paid, there is still no guarantee that the prospects will actually go ahead and sign the full lease agreement. For this reason, many landlords choose to charge those who pay security deposits an inconvenience fee if they end up not taking the rental unit. 

The amount to charge for the inconvenience fee is at the landlord's discretion. However, there are several factors you should consider when deciding on the amount. Think about how long you’ve had to keep the property off the market, how many other interested parties you’ve had to turn away, and any time and money you spent drawing up agreements. Some landlords will not charge an inconvenience fee, especially if several parties are interested in the rental unit.

When should I ask for one?

Holding deposits are a useful tool for both landlords and tenants, especially in a competitive rental market. If you find yourself in such an environment, then landlords should ask for a holding deposit as soon as they express interest in the unit. This will also give the tenant peace of mind, as it means that they can take their time to think about the location and the property features and consult their finances before making any long-term commitments. 

It is illegal for landlords to accept more than one holding deposit from separate interested parties. If one prospective tenant has put down a holding deposit, then the landlord needs to honor the holding period before seeking other tenants. 

Before the prospective tenants transfer any funds, there should be a holding deposit agreement in place containing the following legal information: 

• The full legal names of the landlord and the tenant
• The full address of the rental unit
• The specific duration of the holding period
• The criteria for fully refunding the tenants the holding deposit
• The signatures of both parties and witnesses

Once this agreement is signed, it’s vital that both parties uphold the terms and conditions of the holding deposit agreement.

Is a holding deposit refundable?

Holding deposits are refundable, however, they rarely return to the tenant as a bank transfer. If the tenant proceeds to sign a lease, then the holding deposit is usually deducted from the security deposit or the first month’s rent. 

Tenants should also note that they need to meet the criteria stipulated in the holding deposit agreement to receive the holding deposit refund in full. When putting a one down on a property, you should be prepared to lose it if they decide against signing a lease agreement for a rental unit. 

However, these terms and conditions should be made clear to the tenant by the landlord before any holding deposits are paid.