Mobile Home Park Investor / Licensed Indiana Real Estate Broker · Chicago Area, IL · Member since 2015 · 262 posts · 135 votes
What happens to the tenants security deposit if I purchase a multi family building with tenants already in it. Do I get those from the previous owner? Do I have to factor that in as a cost of purchase? Is there a standard or is it whatever I can negotiate?
Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
11y
All security deposits should be transferred to the new owner at closing. The new owner will be obligated to the tenant for the security deposit, whether or not the new owner receives the funds from the previous owner.
Security Deposits are held separately than operating funds. When a property sells, they are typically handled over in a separate check too, which can then be deposited in a separate account of the new owner to be accessed when a tenant moves out. Security Deposits are the tenant's money until they vacate the unit and a final accounting is completed.
You need to know the rent for each tenant and how much security deposit each tenant paid. Ask for the tenant files from the previous owner, or at least a copy of each tenant lease/rental agreement. If this information is not available, then ask each tenant for a copy of their lease/rental agreement and or proof of how much security deposit they paid to the previous owner. If you can't get a copy of the rental agreement, sometimes it is necessary to get an tenant estoppel letter, whereby the tenant states the terms of the rental agreement, how much their rent is and how much security deposit they paid.
Santa Rosa, CA · Member since 2015 · 191 posts · 75 votes
11y
Since it belongs to the tenant, escrow deducts it from the seller's settlement and transfers it to the new owner. This is true for security deposit, last month rent, and other collected fees.
Rental Property Investor · Greenville SC & Phoenix, AZ · Member since 2011 · 109 posts · 28 votes
11y
@Paul Stout ....but, be careful with that. Sometimes in escrow they can credit the amounts towards your total costs and you don't "really" have that money "in hand" at the closing. If you don't have a lot of money or have good cash flow you could be in a bind should the tenant move out and is due a deposit refund that you don't have. Call or email any time if that isn't clear.
Mobile Home Park Investor / Licensed Indiana Real Estate Broker · Chicago Area, IL · Member since 2015 · 262 posts · 135 votes
11y
I think I understand what your saying @Douglas Davies. If they credit me then I just have to be sure I have the equivalent in an account should a tenant move out. Thanks!
Investor · Dayton, OH · Member since 2015 · 6 posts · 5 votes
11y
Make sure it's in your contract somewhere that the leases/pro-rated rents/deposits/other fees transfer to you at closing. It *should* already be in there, but you would hate to get a bad surprise on any of that.
Santa Rosa, CA · Member since 2015 · 191 posts · 75 votes
11y
Check the settlement in your HUD-1, in buyer's side. Sometimes escrow doesn't show the debit from the sellers side so you have to be on top of it.
I had to do the math myself and found that although I got prorated rents, they didn't give me the security and fees. Seller isn't gonna say anything about it so double check. They had to send me a check later but it took them 6 friggin weeks later!
Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
11y
All security deposits should be transferred to the new owner at closing. The new owner will be obligated to the tenant for the security deposit, whether or not the new owner receives the funds from the previous owner.
Security Deposits are held separately than operating funds. When a property sells, they are typically handled over in a separate check too, which can then be deposited in a separate account of the new owner to be accessed when a tenant moves out. Security Deposits are the tenant's money until they vacate the unit and a final accounting is completed.
You need to know the rent for each tenant and how much security deposit each tenant paid. Ask for the tenant files from the previous owner, or at least a copy of each tenant lease/rental agreement. If this information is not available, then ask each tenant for a copy of their lease/rental agreement and or proof of how much security deposit they paid to the previous owner. If you can't get a copy of the rental agreement, sometimes it is necessary to get an tenant estoppel letter, whereby the tenant states the terms of the rental agreement, how much their rent is and how much security deposit they paid.
The security deposit is in a separate account. The Tenant gets a 1099 for their deposited money while they are a tenant. The landlord holds it in the landlords name though. Only the Landlord can and should withdraw it and hand it over to you at closing. You would then deposit in a new LL/tenant account under your name. Still, check with a lawyer in your state.
The security deposit is in a separate account. The Tenant gets a 1099 for their deposited money while they are a tenant. The landlord holds it in the landlords name though. Only the Landlord can and should withdraw it and hand it over to you at closing. You would then deposit in a new LL/tenant account under your name. Still, check with a lawyer in your state.
We keep all of our tenant security deposits together in a bank account used exclusively for this purpose, but we keep a record as to the amount attributed to each tenant. We state the amount of security deposit received in the rental agreement, so it is clearly recorded for all parties involved. When the tenant vacates the unit, we move their entire security deposit into our checking account (operating funds) and write a check to the tenant out of that account for any amount to be refunded to the tenant. The tenant does not receive a 1099, as it was their money from the start, held in trust, and is not income when they receive it back.
If we were to sell a tenanted property, we would then move all of the tenant security deposits for that property to the checking account and write a check for that amount to the new owner, clearly documenting the names and addresses of each tenant and the amount of each security deposit. Hopefully the OP will get such from the seller!
Are you sure thats not commingling the security accounts? I think that is not allowed. Unless I am misunderstanding something.
The bank holding the deposit requires a w9 from the tenant at time of deposit which tells me they are identifying those funds specifically so they can send out a 1099 related to it.
Are you sure thats not commingling the security accounts? I think that is not allowed. Unless I am misunderstanding something.
The bank holding the deposit requires a w9 from the tenant at time of deposit which tells me they are identifying those funds specifically so they can send out a 1099 related to it.
Quite likely depends on the jurisdiction. For example, in Washington State we are not required to pay interest on security deposit holdings. Are you referring to a 1099-INT (issued by the bank) for interest that the tenant may earn on interest bearing accounts? That may be true in some states. Fortunately, for us it is much more simple, since we don't have to deal with the interest; it is ours to keep [as paltry as it is. :-) ]
Are you sure thats not commingling the security accounts? I think that is not allowed. Unless I am misunderstanding something.
The bank holding the deposit requires a w9 from the tenant at time of deposit which tells me they are identifying those funds specifically so they can send out a 1099 related to it.
Larry,
That is going to depend on jurisdiction. Law firms frequently hold funds from different clients in a single "trust" account. In our home jurisdiction, security deposits are to be remitted to the Office of the Rentalsman who holds them in-trust. In other jurisdictions we are required to hold the funds in trust and, sometimes, pay interest on the principal. We've yet to operate in a jurisdiction that required separate trust accounts for each client/tenant.
Mobile Home Park Investor / Licensed Indiana Real Estate Broker · Chicago Area, IL · Member since 2015 · 262 posts · 135 votes
11y
This is all great information folks, thanks for your contributions!!!! Follow up: Do you have to pay the tenant any interest on their deposit? If so, wouldn't it be difficult to calculate if different deposits are added to the same interest bearing account at different time? I know many banks, including mine, have some very confusing compounding schedules. Would it be better to put each tenants deposit in a separate interest bearing account or combine all deposits in a non-interest bearing account?
What happens to the tenants security deposit if I purchase a multi family building with tenants already in it. Do I get those from the previous owner? Do I have to factor that in as a cost of purchase? Is there a standard or is it whatever I can negotiate?
In my case, the seller notified the tenants, and he transferred all the deposits over. He also gave me the lease paperwork that shows the amount.
Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes
11y
When you close, try your best to do it in the early part of the month. You get the benefit of most of the monthly rents but don't have to worry about collecting. Gives you time to notify all the residents about the changes, too.
Charlotte, NC · Member since 2014 · 8 posts · 0 votes
9y
@Marcia Maynard Thank you for your explanation of how the transfer works at the point of a real estate closing, I'm having an issue however accounting for the security deposit credit we received at closing. Unfortunately, in our particular case, it didn't get transferred to us as a separate check payment but rather just deducted from the cash required to close. This has caused us a bit of hassle from the accounting perspective.
We're using Buildium for our management and accounting. I'm not sure if you are familiar with that but if you are, great. Do you have a recommendation of how we should have treated the $575 and $500 security deposits credited at closing? Even if you aren't familiar with Buildium, how in general from an accounting perspective would you handle this situation?
Thanks for any help you or anyone else might be able to offer on this.
Security deposits, if not turned over to an agency (here, the Rentalsman), should be held in a trust account along with any interest accrued. These funds are not your assets - or those of your company - but are being trusted to hold those funds for the tenant(s).
Accounting-wise, you would keep a separate ledger for the trust account(s) - an accountant familiar with keeping books for attorney's will be apprised of the requirements for trust accounting. When you acquire a new property and the Security Deposits are transferred to you, those funds should be deposited directly into the trust account.