I am looking a multifamily. the current owner states a few tenants used their deposit while living there. What do i need to request from the owner and each tenant to ensure no issues later.
If it were me I would ask for the full security deposits from the current owner at closing. How he gets it is his problem.
Get an "Estopple" letter from the tenants saying what the terms are and what there deposit is. Make sure there are no unwritten or unknown promises you will need to keep. By law the landlord must give you the deposits. It belongs to the tenant not the landlord.
The security deposit should never, ever, be used during the lease. It is YOUR SECURITY that the tenant will fulfill the terms of the lease and return the property in its original condition, minus ordinary wear-and-tear. If they spend it, you have nothing to hold over them.
I recommend contacting the Seller and demanding the security deposits be replaced and transferred to you at the time of sale. As Ned pointed out, you should request an estoppel to verify the exact terms.
The estoppel certificate (or estoppel letter) is a form filled out by the tenant and then confirmed by the Landlord. It's supposed to ensure there are no surprises after closing. For example, you buy the place and the tenant could claim the Seller allowed them to paint the walls black or that their security deposit was twice what the Seller claimed. How will you know? An estoppel certificate fixes this problem.
Some things it may include:
1. Tenant name, contact information, and address
2. Occupancy date
3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate
4. Are there any modifications to the written lease?
5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?
6. Current lease term (expiration date, month-to-month)
7. Current rent rate
8. Rent due date
9. Security deposit amount
You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchange "doc" with "pdf" for more options.
Here is an example and explanation: https://eforms.com/rental/estoppel-certificate/
Some have a lot of legal jargon but this document does not need to be so detailed. This is an important tool for anyone buying a tenant-occupied property.
A security deposit being used by a landlord to cover rent or repairs is a sure sign of a owner that should never be in this business. Legality aside, once it is used it will likely never be seen again. This is the action of a very naïve/stupid landlord.
The seller having used the security deposit is irrelevant to the buyer. The seller still owes that money to the buyer whether he was stupid enough to use it up or not.
Get your esstopal letters and you will know exactly what you are owed.
Security deposits are the tenant's money.
If the owner used the deposit for a valid reason, with the tenant's consent, that is their prerogative. (It might not be a best practice, but there is nothing inherently wrong or stupid about doing so. There are situations when it can make sense).
Granted, if the owner just spent the deposits without the tenant's knowledge or consent (which may well be the case...we don't know) then that is indeed ignorant (and illegal in most states).
So keep in mind there are two possible scenarios here:
1. Owner and Tenant mutually agreed to liquidate the security deposit for a valid reason. Lease says security deposit should be $500 (or whatever), estoppel confirms it is indeed $0. You'd most likely get $0 transferred at closing for the security deposit.
2. Owner spent the security deposit without tenant's knowledge or permission. Lease says security deposit should be $500 (or whatever), estoppel confirms tenant thinks their $500 is still there. You should get $500 transferred to you at closing - whether it comes from a security deposit escrow account, or the seller's proceeds, is not your concern - you just need the tenant's $500.
As other's have stated, the key for you is to get an estoppel letter from each tenant (PM me and I can email you some examples).
In either scenario above, you, as the buyer, want to make sure the deposits and prorated rents transferred to you at closing match what the leases and/or estoppels say.
The main thing you want to avoid is getting $0 transferred to you at closing, then finding out you actually owe the tenant their security deposit back when they move out.