Mom and Pop 16 unit doesn’t have any records

34 Replies

Hey Everyone, I will try my best to make this long story short. We are getting close to closing on a 16 unit complex. The problem we have never thought of until now is that because the owners have struggled to provide normal documents like rent rolls and leases (a lot of the tenants have been in their units for years, now renting month to month) we worry that when it comes times to transfer over security deposits there will either be none or the amount will be minimal. We aren’t as worried about the amount as we are the lack of book keeping. The fear being that the owner says this is all we collected and tenants come after us saying here is my original lease I want my deposit back. I was thinking of writing some amendment for the owner to sign saying they didn’t collect any security deposits from A,B,C tenant so that if this issue comes up in the future we can refer them to the sellers. Am I being overly paranoid here? We just have always purchased places with leases that state the security deposit amount and that amount is transferred at closing. Thanks in advance for any feedback.

Seems to me to solution is fairly simple. Deduct the amount of the deposits from the agreed upon purchase price and tell the seller not to worry about transferring them. 

How about asking the tenants if they have a copy of their original lease, and if not asking if/how much they paid as a security deposit. Then ask them to sign something attesting to the amount?

@Ali Hashemi the only problem is we don’t know who has paid or what amount they paid or if anything was actually collected. No leases exist anymore for the long term renters according to the sellers. I agree with you if we knew the amount or ball park we could negotiate it out.

Eric, you’re right probably wouldn’t hurt to request estoppel statements from the tenants. It could help fill in blanks from lack of actual leases.

@Jeremy Woods maybe I’m over simplifying, but that’s the sellers problem. Let him collect from the tenants if they paid. So long as the full amount of the deposits is deducted off your purchase amount what do you care if they truly paid. 

In business we call it buying ones receivables/payables. In this case you don’t want his so he can keep or collect. Not your problem. 

I think we might be on two different ideas. We aren’t worry about balancing the books we are worried that there is no record whatsoever of security deposits we are having to go off the owners word. It’s not going to bother us in finishing the sale and transferring ownership we are worried once these tenants move out they are going to come looking for their security deposit back in which the last seller told us there was never one to begin with. Granted they’ll need to prove it but if they do we will then be on the hook for returning the money.

Wow! Honestly, I don't think you can be overly paranoid in this situation. YES, estoppel statements. For any discrepancy, I would ask for all of the cash for security deposits from the seller, whether you get cash at close or funds are held in escrow. I also think you need leases from every tenant clearly stating what your terms are. You're potentially signing up for a nightmare if you don't have some sort of understanding (legal and on paper) with every tenant. 

@Jeremy Woods Even if they don't have records, they should at least "know" how much deposit they have from each tenant. They likely don't actually have that money in a separate account like they should, but get a list of what they say each person's deposit is before going to the renters for an estoppel verifying amount. Rather than asking what their deposit is out of the blue with no ballpark, I think it would be easier to ask them "is it true that you have a $500 security deposit with the landlord? yes? please fill this out" if they say no, have them state the amount in a new estoppel and take back to the seller for his agreement. Get an agreed upon total of security deposits "held" by the seller and backed up by estoppels from tenants. Once this number has been agreed upon, it simply will be factored into the closing settlement. Getting to solid number may be an issue if tenants and seller disagree, but once a number is agreed upon for all tenants deposits, it should be a closing adjustment rather than a separate exchanging of funds. I would imagine, however, that you would need to do a walk-through and could really only charge them for damages done after taking ownership. You can't prove they caused any current damage if the guy doesn't have any records...
I believe I read one time that some states require the deposits to be returned to the tenants who then pay it to you. I thought of that just after posting.

I would probably structure it a way where the seller would return the deposits and I would collect a new deposit from the tenant when I get them to sign a new lease.  

Get the tenants to sign an estopel saying what the terms of the lease are and have the owner credit you the rent and deposit. Get a feel for each tenant and put aside money for an eviction if you need to do it.

I'd question some of the advice here, mishandling security deposits can open a landlord up to serious issues and fines. I don't know your state law, but I bet they were required to keep the security deposits in a separate, interest bearing account. If they didn't do so they are likely liable to the tenants and the tenants would get the security deposit back no matter what damage, at least in MA and the landlord would be liable for TRIPLE damages. I'd check with a lawyer for a good solution, and do so while its still the sellers problem. Don't inherit a mess

@Jeremy Woods

Hi Jeremy

We had same problem on our first deal. @Jake Stenziano went door knocking on all 25 units to verify who the tenant was and what the security was, if any.  We had weekly renters at our first deal, so very little in the way of security or leases.

Just understand that when you take property over, you are going to assume the leases that are signed.  Make sure there are no Uncle Tony's renting for 6 years at $200 per month.   Make sure they are renting month to month.

This is the classic mom & pop

Congrats

Gino

You do not have a problem, the seller does. As stated many times the solution to the problem will be resolved with your esstopal letters. Esstopal letters are mandatory when investing in a property with existing tenants. If you do not have them you have not completed your due diligence on the proprerty.

If you do not have esstopal letters you are not adequately protection your investment.

@Gino Barbaro I actually just listened to your podcast a few weeks ago and remembered that story.

Thanks everyone for the advice we are asking the sellers to provide estoppel statements for the units that they were unable to provide us a lease for. I knew if posted on here the community would point me in the right direction.

If you are that worried, why not take it to the max. Make the seller implement new leases (that you approve) as a condition of closing (assuming these units are m2m).

Then reduce your offer by the amount of the security deposits called out in the leases that the tenants have signed, this way you know exactly how much funds are needed (like already mentioned).

Now you have new leases as well as baseline of the condition of the units (if you do a inspection along w/ the new lease)......and there's no mystery left about anything.

Just to be clear when you say request estoppel statements from the seller. You mean you will get signed estoppel agreements by the tenant. I would also have your lawyer draft them so they are clear and complete where deposits can be entered by the seller/tenant but the language is yours. The deposits would be listed on the closing statement as a credit.

I had the same issues with a sixplex I bought. Seller did all his accounting on an old yellow pad. Have the seller get a current estoppel agreement from every tenant, even if you have a lease in hand. Have it dated and signed by the seller and tenant. Make sure you have the agreement state that the amount on the agreement supersedes any other amount listed in the lease or any other document.  Then get that amount deducted off the sales price. This eliminates any issues later on down the road.