Real Estate Agent · Ocean View, NJ · Member since 2015 · 76 posts · 25 votes
Hello all!
I've already learned a valuable lesson in investing in small mutlfiamilies - including what happens to the security deposits in the initial offer.
We close on a duplex next week and I was under the impression we would receive a credit for the security deposits at closing.
However, the agent for the seller is trying to tell me that the seller is going to keep the security deposit as rent if the tenant doesn't pay February's rent. Is that allowed?! She's saying I then have to collect another security deposit from the tenant.
The tenant is on a month to month lease and the agent is saying the seller is allowed to keep it since it's a month to month lease... but wouldn't be allowed to keep it if it was a yearly lease. But it's still a lease and the tenant wasn't given notice to move out - just notice of the sale of the property.
it is supposed to go to new owner. It's technically the tenents money and is only being held in trust by the landlord. So if there is a new landlord then the security deposits just get moved to new owner to hold on to. You cant expect a tenent to come up with 2 months rent just because someone bought their apt. They have a hard enough time as it is just paying rent.
@Kiersten Vogt I actually just went through this last month during the closing on my duplex. In a perfect world you should be credited their security deposits per each tenant and pro rated rent. In my particular case it was anything but normal.
1. At the closing the seller only credited me one of the security deposits because 'he only collected 1 floors security deposit. '. When I took ownership to confirm this with tenant, I found out that in fact he took her security deposit because she owed back paid rent. She apparently signed off to this but I was never made aware of these terms nor was I given the proper paper work that outlined this agreement. I am still in the process of getting this 'agreement' between the previous owner and tenant. It is important to get this in writing because when she moves out (without that document) she could technically say I owe her a security deposit.
2. I was credited with the other floors security deposit but it was my job to go collect the pro rated rent (shouldn't of been the case). Come to find out the previous owner only collected half months rent because that's all the tenant had at the time and it was my job to go collect the rest. The real kicker in all this is that, he completely wrote the leases backwards (1st floor tenant is really 2nd floor and visa versa.... each with different rents specified). The only saving grace is that the tenants are actually nice and respectful and I don't think would do anything malicious but I am stuck with these leases until March when they are up.
3. Moral to all this Kiersten is, have your lawyer specify everything up front. No question is a stupid question. If the closing takes 2-3 hours because items are not spelt out for you, so be it. It's better to know all the info than piecing everything together afterwards.
@Kiersten Vogt the agent is incorrect. Security deposit can be used to satisfy unpaid rents only AFTER move out. If the tenant has not given notice and the seller is not given them notice to vacate, then they are not moving out. If the landlord is saying the agreement is month to month, then only if they gave notice of non-renewal prior to February 1st, would the agreement terminate at the end of February. Still, even in this case, the security deposit disposition doesn't take place until AFTER they leave the property. Then the landlord needs to send a letter summarizing damage deductions and any deductions for unpaid rent.
This is how it should work:
A. If the tenant doesn't pay rent by closing, then it may become responsibility of the new owner to collect rent. The prorated portion of February rent would then be paid to the seller upon collection. For example, let's say you close on February 7th. The seller is due rent from February 1-7. There is 28 days in February, so that is 25% of February rent. If rent was $1000, then the seller should get a check for $250 from the buyer upon collection.
B. If the tenant pays rent by closing, the prorated rents would transfer to the buyer. For example, let's say you close on February 7th. The buyer is due rent from February 8-28. There is 28 days in February, so that is 75% of February rent. If rent was $1000, then the buyer should get a check for $750 from the seller at closing.
In either case, the security deposit transfers at closing. Personally, I would speak with the tenant in question and ask when they plan to pay rent. My concern here is that the seller will keep the full security deposit and full February rent. They may claim they had "not received it yet" or they will try to withhold late fees. Ask the tenant to make sure they pay with money order or check and tell them to keep photograph of the payment and envelope as proof of the payment. If you receive the photograph from the tenant, insist on your 75% of rent or refuse to sign the paperwork at closing. If the sellers agent refuses to support you, threaten to file an ethics complaint.
No matter what, make sure the seller keeps no more than 25% of February rent.
Have you had the opportunity to check with a real estate attorney yet, Kiersten? The verbiage of the addendum sounds pretty clear cut that the buyer will receive the security deposits at settlement.
Someone else mentioned the pro-rated rent for February. Hopefully that is covered in your contract as well, but you should make sure you are getting that if the seller has already received the full payments for February.
As for the lease, does the seller have the only copy or is it possible that the tenant for that lease may have a copy which the seller signed? Sometimes landlords will fill out two contracts with everything completed except for the signatures and just sign twice. It could be possibly they signed one copy and forgot to do the other.
I think it’s a nationwide thing that the Seller is supposed to transfer the security deposit to you through escrow at closing. He’s able to leverage a separate recourse to recoup unpaid/lost rents from the tenants.
FWIW, I closed on a SFH where the seller did not turn over the tenant's SD or pro-rated rent to me. However, I knew that was happening well ahead of time and agreed to it, in exchange for not paying the seller back the pro-rated property taxes. In the parish (county) the property is located in, property taxes are paid ahead and the buyer normally has to pay the seller back the pro-rated amount at closing. I came out about $70 ahead doing it that way though, ironically, it was the seller who was adamant about not wanting to "fool with the SD and pro-rated rent" in the contract or at closing. She inherited a number of rental houses and I strongly suspect was not familiar with the normal process and found it confusing.
The SD the tenant had paid was certainly still hers and now became my responsibility. Even though I technically didn't collect it from the previous owner. When that tenant moved out, I subtracted it off the damages and unpaid rent.
@Michael Doherty Thanks for sharing your scenario... it definitely makes sense about not being able to prorate if the rent isn't even collected but I definitely am not backing down on getting the security deposit!
@Joe Splitrock Yes, I was under the impression security deposit was only to be used at move out and not for unpaid rent in the middle of a lease term. Thank you for the examples!
@Chase Louderback I haven't found a landlord/tenant attorney yet who knows what they are talking about... but yes the addendum does make it pretty clear they owe the security deposit at settlement. As far as the prorated rent, the title company will only put it on the settlement if it's received. They say they can't prorate something that isn't paid which makes total sense. I still haven't received an answer as to why one lease isn't signed.
I think it’s a nationwide thing that the Seller is supposed to transfer the security deposit to you through escrow at closing. He’s able to leverage a separate recourse to recoup unpaid/lost rents from the tenants.
That's what I thought and the reason I didn't think to add it into my offer. Lesson learned.
That is illegal in Minnesota, Wisconsin and Kentucky. You can only access the security deposit when the tenant moves out. The deposit goes back to the tenant plus interest or you keep it for damages or past due rent.
Update: The tenant paid 5 days before closing so we didn't have to worry about the security deposits and rent. The rent was prorated from the 12th to the the 28th of February and both units' security deposit was transferred over to us. Now the real work of repairing the building and managing the tenants begins!
Hi Kiersten! I am in PA too and would love to know the outcome or the key takeaways from this real estate transaction. I am in a situation similar. Would love to have a phone convo with you!