Podcast 52: Non-Refundable Application Fee

Landlords deal with lots of fees, from late fees to application fees. Some landlords have questions about non-refundable application fees, such as whether they are even legal and if there are any exceptions that require refunding. In this episode of Night School, we’ll talk about the ins and outs of non-refundable application fees and what landlords need to know about them.

Transcription for Non-refundable Application Fee

Jeff: Welcome to Landlord University Night School. I’m Jeff Pearson, and this is my co-host…
Stephen: Stephen White.
Jeff: Hello, Stephen. How are you doing this evening?
Stephen: Pretty good, Jeff. Perfect time to be talking about our next topic, which is non-refundable application fees. It’s perfect because we just received, which happens pretty often here at RentPrep, a chargeback, which means somebody charged something to their credit card to pay for services, in this case, it was background check services, and then they decided, you know, a week later or a month later, whatever the case may be, that they no longer want those services, or they didn’t agree to those services. And then they charge it back, which means they call up their bank, or whoever their credit is through, and say, “You know what? This was an unauthorized transaction, and it should be reversed.” The bank will gladly oblige, and put the responsibility on the merchant, being us, to provide proof that this person did, in fact, authorize and order services.
In our case, it was a very specific scenario, which we do see somewhat often. The landlord had taken the applicant’s credit card information to pay for the application fee. The landlord had the…you know, they had good intentions. Their intentions were, “Well, why should I pay for the background check, when ultimately the application fee is going to be paying for the background check? I don’t want to be the middleman in this. I’m going to have the tenant pay the application fee directly to RentPrep, and that’s it. We’re going to call it a day.”
So this is the obvious problem. When that tenant, or applicant, I should say, doesn’t get the apartment. Now that non-refundable application fee doesn’t look so great. They want that to be refundable. They want their money back. They didn’t get the apartment. They feel like they don’t owe an application fee. They’re not going to be living there, so they’re going to try to get their money back. In this case, that’s what happened to us, and we lost the chargeback case because we never went into an agreement, you know, the applicant never agreed to our terms. Technically, the applicant was right in the fact that they didn’t authorize the transaction.
Jeff: So you basically entered an agreement with the landlord.
Stephen: Yeah, exactly.
Jeff: And the landlord gave you the applicant’s credit card information.
Stephen: Yes, the landlord was…and you know, the landlord did not do this maliciously, obviously.
Jeff: Sure.
Stephen: The landlord was just thinking, “I’m going to save myself being the middleman here. I’m going to just process the applicant’s money as the background check, nothing, no wrongdoing there, and we’ll call it a day.” But again, the obvious problem is that that person has the ability now to reverse those charges. So it’s obviously never a good idea to take somebody’s credit card information, or give someone your credit card information like that, for that matter.
But, you know, an application fee, to begin with, should always be non-refundable, and it needs to be identified as such in the rental application itself. So on the RentPrep rental application that we give away for free on the site, in the members area, it says right on there, very clearly, “There is a non-refundable application fee of…” and it has a line for the landlord to decide what that’s going to be. It’s important to have them agree to that and initial it, or put it right near…in our case, it’s right near the signature where they sign, because we want that acknowledgment very close together so that there’s no disputing the fact that if they don’t get this place, it doesn’t mean they get their money back.
The landlord sure isn’t going to get reimbursed if we find evictions and things like that. We’ve done our job, we deserve to get paid. The background check company deserves to get paid. The landlord did their job in screening, they deserve to be paid the application fee for processing the application. Ultimately, the tenant knowingly went into this knowing that there was a non-refundable application fee. If they had something on their background check that prevented them from getting the apartment, that’s on them.
Jeff: Right. For this particular situation that you were talking about, the application fee was only the cost of the background check.
Stephen: Right.
Jeff: But landlords can also charge additional fees. So they could charge, say, a $75 or $60 application fee, even though their cost is going to be less than that for the background check.
Stephen: Depending on where you live.
Jeff: Okay.
Stephen: For example, San Francisco, which is known to be really hard on landlords, they’re not very landlord friendly in San Francisco, and San Francisco has one of the wackiest application laws I’ve ever seen that says you can’t charge – and don’t ask me where they came up with this dollar number, it’s such and exact amount, I have no idea where they got it from, but they say you cannot charge anything more than $42.07. And that’s what it is.
So, you know, you just can’t charge more than that. But I think it actually says you can’t charge more than the cost of the background check, or $42.07, the lesser of the two typically.
Jeff: Really?
Stephen: Yeah, so depending on where you live. Wisconsin has some really, really strict application fee laws. Each state’s different, and some states don’t have any, you know? In New York, where we are, we see people charge $50, $100. For them, that’s their first line of screening. You know, whoever is willing to pay that must be pretty serious about this and must really feel that they’ve got a good background check to be able to pass the screening process, you know, if they’re willing to pay that big of an application fee.
But definitely be sure in your state, and in your area, not even just in your state, because San Francisco’s a great example of that, it doesn’t matter what California state says, in San Francisco they have their own rules. So be sure in your area, your region, that you are well aware of what those limitations are, because they do exist. There are some places that just have wacky laws about it.
Jeff: Perfect.
Stephen: So again, non-refundable. It’s okay, as long as you identify that it’s non-refundable, meaning you don’t get that money back. I mean, I see a lot of landlords that will put a provision in there or in a lease agreement that says we’ll credit you the $30 or $35, whatever that fee was, back onto your first month’s if we approve your lease, or whatever. You know, they’ll be fair about it. But you know, again, it’s also everybody’s getting processed, so that fee can’t be returned to everyone that doesn’t get rented to. The landlord would be just losing constantly.
Jeff: Yes. Exactly. The landlords have to…they have to spend the money, or it makes sense to spend the money to get the background check, whether they’re doing it themselves or they’re paying another company. So, you know, charging that fee is reasonable, along as the amount of the fee is reasonable. You know, $42.07, it’s reasonable, but does it really cover the cost. It’s an important piece of the puzzle to be sure that you have that, but also, like you said, make sure that it’s very clearly documented in your application so that it’s clear to these applicants that this is non-refundable.
Stephen: Right, exactly. And just double check your own municipality, which perfectly ties into our next segment. It’s going to be landlord associations, and are they worth your time? A landlord association, especially a local landlord association, obviously can be a great source of information for that type of thing. They’re going to know what those local laws are and what those local limitations are.
Jeff: Perfect. We’ll look forward to talking about landlord associations when we get together again. Thank you very much, Stephen. I’ll look forward to talking to you about that tomorrow evening.
Stephen: All right. Thanks, Jeff.