Investor · Mission Viejo, CA · Member since 2013 · 48 posts · 14 votes
Hi,
I am negotiating on the purchase of a four-plex in Arizona. The seller just countered my purchase offer stating that they don't have any of the security deposits for the tenants in the four-plex.
I haven't received any of the leases yet so I don't know what this security deposit amount is.
Does anyone have suggestions on how I should respond? I am thinking that I could counter for a price reduction in the amount of the total security deposits. The seller's agent mentioned that they had multiple offers so I am concerned about pushing too hard on the counter. Or, I just could take over the burden of the security deposits.
Do you know if its possible to go back to the person/prior owner who the tenant signed the lease with to try to get the security deposits?
Does the owner mean security deposits were never collected? Or that they were collected and the owner spent them and they won't be transferred? Assuming deposits were collected you will be responsible for returning them when the tenants leave. This is a situation where estopple letters that outline key term, including security deposit, and are signed by the tenants will be very useful.
As far as negotiation this is essentially a "defect" with the property that you will have to pay to fix. I'd treat it like any other defect and adjust the price accordingly. Don't fall into the "there are other bidders so you will have to overpay if you really want it" trap. Which is exactly what the seller's agent wants. If its a good enough deal, just absorbing the cost might be OK. Or this might be the cost that turns this into a bad deal.
Dean, you pretty much narrowed down your options. You can eat the security deposit amount and remain comfortable with the purchase. Or you can counter back for the amount of the security deposits off the last price offered. Either way you need to get a copy of the leases to determine what you are looking at. If the rent is $1,000 a month and the security deposit was the same and the tenants paid last months rent as well that could be an $8,000 swing which is pretty significant. After the sale goes through there is no way that I have heard of to go back after someone for security deposit especially since you signed the paper work at closing. Now you must get those leases or at least a verbal confirmation of the terms needed (security deposit and last months rent amounts) and make your decision on whether that will still make it a good deal with that information considering as well that the agent "says" there are other offers. I would write a contingency that your offer is predicatedon the information provided and that leases must be provided to confirm within 3-5 days to verify and remove the condition as satisfied.
The security deposits should not be a factor in the price you pay for the property. If the Vendor, or a previous owner, collected security deposits from a current tenant your expectation should be those deposits will be transferred to you at Close {regardless of the price you are paying for the property}. This is no different than making adjustments for pre-paid expenses.
Here the landlord is suppose to remit any collected security deposit to the Rentalsman to be held in trust on behalf of the tenant, though this frequently does not happen.
When purchasing a new property we first check to see if deposits are on-file with the Rentalsman - if they are, it's a non-issue.
We still ask for a copy of current leases from the landlord. Once we have reviewed the leases, we prepare an estoppel certificate for each tenant which includes: Rent amount, security deposit amount paid, term of the lease, length of existing tenancy, and any other landlord incentives or covenants in-place. We then get each tenant to verify the accuracy of the estoppel and sign it. A copy is then provided to the Vendor.
With this information, our council simply factors the transfer of security deposits into the adjustments made at close.
I purchased a building where the current owners did not have security deposits for 3 of the 7 tenants. The building had previously been in foreclosure before the current owners took it over. There was no documentation that the 3 tenants had paid deposits but they claimed they had. When I took over the building I issued change of ownership letters and stated the deposit amounts I received (or did not receive) in escrow and that if there were any discrepancies the tenant would need to contact the previous owners directly.
Does the owner mean security deposits were never collected? Or that they were collected and the owner spent them and they won't be transferred? Assuming deposits were collected you will be responsible for returning them when the tenants leave. This is a situation where estopple letters that outline key term, including security deposit, and are signed by the tenants will be very useful.
As far as negotiation this is essentially a "defect" with the property that you will have to pay to fix. I'd treat it like any other defect and adjust the price accordingly. Don't fall into the "there are other bidders so you will have to overpay if you really want it" trap. Which is exactly what the seller's agent wants. If its a good enough deal, just absorbing the cost might be OK. Or this might be the cost that turns this into a bad deal.
IF deposits were collected then i would work for an adjustment in price. Other offers mention is a scare tactic. Of course you can choose to just absorb those costs, BUT i wouldn't without atleast trying to get all or some of it out of the sale... but it depends on the deal as well how good of a deal is it, if it falls thru due to this are you missing out on a great opportunity or are their others out there that you can jump on?
I would not worry too much about the deposits. I estimate the total amount to about $2000, so just consider it as paying $2000 more for the complex. However, this is a red flag on the other hand. The seller might be trying to fill in the vacancies just for the purpose of listing. This might mean he took in just low quality tenants with no deposit, no background checks, etc ... Please review the lease contract carefully. If all or most tenants were filled very recently, probably my gut feeling is correct.
Thank You All for the responses. I have learned a lot. In response to earlier post, I'm not sure if the seller collected security deposits or if the tenants were in place and they "forgot" to collect the security deposits from the prior owner. The seller acquired the property in 12/2012.
I'm going to try to get the leases or put a contingency in there about the leases to check if a prior owner collected last month's rent and security deposit.
I learned a new term, estoppel certificate. I'll need to research this as well.
@Dean Suzuki also be sure you find out with the estoppel what the tenants are expecting. If they paid a security deposit, they will be expecting one back. If you don't have one, then they may get upset. Tenants don't always know or understand legally what is going on, they just know they paid something and they want what they paid back.
Simply put, the Last Month's Rent and Security Deposit do not belong to the owner of the property. They are funds that MAY be used at a later date. These funds should never be considered when pricing out the property as they will not belong to you either.
The estoppel letter (or certificate) should be verified by both parties before closing. Make the rounds to the tenants yourself. If the numbers they give you don't match the lease, find out why.
I ran into this exact problem at the closing of my first house. I had no clue about estoppel letters, all I had were the copies of the lease. I walked out on the closing and only got to my car before the seller agreed to drop the price for all of the missing money.
My 2nd property went smoothly because I had verified all of the information related to the leases long before we went to closing.
Since you mention that the owner bought only in 12/12, I suspect that this may have been a foreclosure and that he may have never gotten deposits.
And if it had been a foreclosure, was there a time of uncertainty and transfer, when the tenants didn't pay any rent and might not say anything about deposits?
Again, just guessing between the lines and can be totally wrong.
I would take a look at the title chain and see who owned when. as that would give you a clearer picture.
Here in AZ you're not supposed to collect pre-paid rents along with a security deposit (not saying it doesn't happen though). Regardless of who the current property owner bought the property from, he/she is still responsible for the security deposits and their transfer to the new property owner (assuming the sec dep's we're lined out on the lease agreements).
1st, get copies of the leases as part of your due diligence. 2nd, if you think you're getting the security deposits, make sure they are spelled out on the HUD1 statement. If it isn't on the HUD, it isn't happening.