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.
I’ll have to check the state’s law. I never have heard of that but it’s worth looking into.
@Jeremy Woods ....I don’t think you understand bud, you ARE collecting the deposits by reducing the asking price by that amount. Not sure how to explain this to you further.
Google Tenant Estoppel Certificate
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.
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
Reduce the purchase price by the missing amounts .
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
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.
I hope you keep listening. Got tons of those stories!
Let me know if you have any other questions
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.
Another vote for Estoppel Certificates. We usually have the buyer fill out one for each tenant as well, but that might not be feasible in your case.
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.