I had a perspective tenant who signed a 1 year lease agreement and was supposed to move in on 7/5/08. While getting the rental property together for her move in we found out that there were roaches in the house(were not aware this problem existed prior to the old tenant vacating the property.) I called an exterminator to come in and service the unit and they assured me that the pesticide they were going to use would fix the problem, because there was a very minor issue and the unit was not infested. I shared this with the tenant and she decided that she could not move into a place that had roaches--even if the problem had been fixed--the thought of it she could not tolerate. She decided not to move in and wants to be refunded her security deposit. By law does the security deposit have to be refunded?

Yes, the purpose of the deposit is to protect you against damage by the employee. However, you MIGHT have a case in keeping some part of it until you can find a new tenant. This might not fly in a court however. I'd refund the deposit and chalk it up to bad luck.

I agree with Scott. I've been a landlord for 15 + years. This is exactly the type of situation where you have the choice of doing the "right" thing (the nice thing) or enforcing the lease and laws to the letter, but having to be basically hard-nosed in the process. I know other investors who basically don't do anything they don't HAVE to do(sometimes not even then), and let me tell you... they're little more than slum lords. Their tenants know it, I hear about it all the time, and I get their disgruntled tenants all the time.

Give her the deposit back, feel good about being honest with her knowing that you did a good thing.

That's not to say there aren't situations where you have to be hard nosed. You can't lay down and let people walk all over you. It's a delicate balance!