Security deposit and last months rent

12 Replies

At the closing of an already rented property (duplex) of course the security deposit is transferred to the buyer does that mean the last months rent should've also been credited to the buyer ?

@Tereal Wilsonn , it is not typical to collect the last month rent from a tenant up front in Michigan. Michigan law limits the security deposit to 1.5 times the monthly rent. If the landlord collected the last month rent up front they would only be allowed, by law, to collect another 1/2 month rent as a security deposit.

Any funds collected from the tenant but NOT applied to charges are technically property of the Tenant. The security deposit is one example but rent paid in advance should be treated the same. I had a tenant that paid a full year of rent every October. I couldn't spend the money because there is always risk of something happening before the funds are applied to a charge (i.e. death, early lease termination, etc.) I escrowed the funds and applied them as charges came due.

This is why it is important for a buyer to review any agreements and accounts to ensure the appropriate funds transfer at closing.

And Jeff is correct about the last month's rent being considered part of the security deposit. Here's how it is explained:

Sometimes the lease requires that both the first and last months’ rent be paid before a tenant moves in. If this is the case, the last month’s rent would be considered a security deposit. Sometimes, too, additional fees or deposits are charged to hold the rental property, for credit checks, for pets, for cleaning, for keys, for mailboxes, for storage, and for many other reasons. While these fees or deposits may not be called “security deposits” in the lease, if they are otherwise refundable, they are still considered by law to be part of the security deposit and subject to the strict rules that Michigan has adopted— including the limit on the total amount that a landlord may collect.

This is a ridiculous requirement, but it is the law. I'm glad I am not in such a restrictive state!

@Tereal Wilsonn it means I hold it in trust, just like I would a security deposit. As a Property Manager with hundreds of Rentals, I keep security deposits in a Trust account. As a private investor, you may be able to use a standard checking or savings account, but you are still holding it "in trust" for the Tenant.

@Tereal Wilsonn - It depends on when the closing was.  If I close before the 5th of the month, then as the buyer I am usually responsible for collecting the rent that month.  If I close after the 5th, as the buyer I usually get a prorated credit from the closing until the end of the month.  

If the seller has not collected rent after the 5th and wants me to be responsible for rent collection, I push the closing back until they have collected rent and will give me a credit.  There is no way I am going to be responsible for collecting past due rent right off the bat.  I also use an addendum that no units can be sign a new lease, vacated, past due, or in process of eviction prior to closing without my approval 

Michigan "security law" (Landlord-Tenant Relationship Act) applies here.  ANY funds collected in advance that are not the first month's rent or the security deposit are part of the security deposit--unless they are non-refundable fees, e.g. cleaning or pet fees.  (Never use the word deposit for a non-refundable fee and never suggest you'll give it back to them if they "leave the place clean.")  The maximum security deposit is 1.5x the monthly rent in Michigan.

You should ask the seller to transfer all the "deposit" funds to you at the time of the closing.  This would include the "security deposit" as stipulated in the lease and last month's rent (as it is also part of the security deposit).  If the amount exceeds the amount allowed under law for a security deposit, you could have the seller refund the tenant(s) their overcharges in advance of the closing or do it yourself after the closing.  (It would be less messy to have the seller do it.)

Hope that helps!

Clay

Director/RPOA

Thanks everyone for the positive information, i come to understand that  there wasn't a last months rent paid but the deposit was 775 and that will due after final walk through, when tenat moves on