Rental Property Investor · Windsor, CO · Member since 2017 · 79 posts · 57 votes
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.
Investor · Southern Indiana, IN · Member since 2017 · 178 posts · 95 votes
8y
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.
Real Estate Broker · Apopka, FL · Member since 2017 · 492 posts · 528 votes
8y
@Jonathan R McLaughlin in regards to the proper accounting of security deposits, wouldn't the consequences for improper handling of deposit money fall on the seller only? I would imagine if the OP received a credit at closing for the security deposits (with estoppels etc) and then placed the exact amounts in the proper accounts from day 1 himself, he wouldn't be liable for the fact that the mom and pop had commingled and converted the funds long ago. Not that you said anything to the contrary, but just curious on where that line is drawn.
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
8y
Estoppel is by the tenant and current owner agreeing to the current state of the agreement between them pre closing. New lease would be between you and the tenant post closing.
First, get the current tenants to fill in an estoppel form and reconcile those with what the Sellers have been telling. Now, if you find some discrepancies there, you might want to protect yourself from any legal quagmires down the line, for example, when tenants vacant and they start asking you for their deposits. Best to get both sides to agree now on deposit amounts especially when you have the Sellers' attention before they go off to their retirement place and its hard to reach them.
Hope this helps, Jeremy. Goodluck on stabilising the asset. Thanks! - Ola
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
8y
@Russell Holmes yes I think that should be true. It sounded a bit like there was a chance that wouldn't happen (i.e people recommending the sellers just giving him a discount and no records) and as a practical matter I'd hate to have the tenants be looking to be made whole from him and that spilling over to my day to day.
And who knows if the law in CO has one of those random wrinkles about knowledge of improper handling surviving transfer/superseding estoppels etc. Stranger things have been adjudicated.
The buyer should be able to combine all the security deposits in one umbrella sec dev account (you can in MA) as long as the funds are traceable, interest paid etc. No legal advice given. Id be curious to learn what the seller winds up doing here.
Rental Property Investor · Windsor, CO · Member since 2017 · 79 posts · 57 votes
8y
@Mindy Jensen I wish it was in Windsor, having to look for deals out of state now, as you already know the market here is getting a bit out of hand.
We reached out to the Seller the other day to put the onus on him to get all tenants to sign estoppel statements. Hopefully this will help squash any issues in the future. If it does come back that he hasn't been holding on to the deposits and correctly accounting for them, Ill leave that issue to the tenants and seller.
@Matt K. I would rather go for the estoppel statement because if they are on a month to month I can then implement my own leases vs. the sellers current lease which is a 3 page document and seemingly vague on a lot of issues.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
8y
My thought process was that you create and give the seller the new lease, the seller (since they have the relationship w/ the tenants) can be the one to get them signed.... saves you the time/hassle of having to do it. It'd also help you gauge the vacancy rate once implemented.
Rental Property Investor · Windsor, CO · Member since 2017 · 79 posts · 57 votes
8y
@Matt K. I definitely agree with you on that having the seller implement the new lease signings vs. myself would definitely lower the amount of push back or turnover that I may be facing. The deal has been tough from the start I think the agents (I'm purchasing out of state so I'm not representing myself) have been the biggest issue on getting this deal to close. I figured the one/two page estoppel is going to be easier to get completed then handing them my 15 page lease lol. I'm just trying to get this to the closing table .....eventually.