Security Deposit during sale of property

[Alex Martin]

I'm selling a chunk of my portfolio and in the process of handing over the security deposits to the new owner. There are several tenants that if they moved out tomorrow would not be getting a portion or any of their deposits back due to damages, they caused, which I've already repaired or from being short on rent some months. 

In my mind, I've already incurred the expenses that are exactly what a security deposit is there for. So why would I give it to the next owner if it's already been allocated towards something and the tenant potentially get back something they otherwise would not have been entitled to simply because there was a sale of the property?

I'm sure this is not an uncommon issue, but I just was not sure how to best handle it. Across the entire portfolio it's not an insignificant amount of money, in the 10's of thousands. I wasn't sure if I should just update the deposit to what is still owed to the tenant and that's what I give the new owner and possibly sign something saying that if the tenant disagrees with that portion of it, I will still assume all liability for that?

[Gregory Schwartz]

In our area, the standard practice is that the deposit amount specified in the lease should be transferred because that is technically the tenant's money and as long as they occupy the unit, the funds should stay with that unit. Additionally, we're required to provide documentation whenever a tenant’s deposit is used. For example, if I charge a tenant for damages incurred during their tenancy and use $200 of their $1,000 deposit, I ensure there is clear documentation and communication with the tenant. This documentation, when provided to a buyer, helps justify any discrepancies in the deposit amount.

**As a general rule, we don’t use security deposits for repairs while the tenant is still occupying the property. The deposit is intended to cover damages at move-out. If I allow tenants to use the deposit for damages during their tenancy, I won't have enough left to cover potential damages during the turnover.