I'm in the process of putting together a deal where I am buying 2 twin properties. Its one building but two separate homes side by side and I'm buying them both simultaneously. They are both tenant occupied, and I will be inheriting the tenants. Its a great deal but the seller just told me as we are putting together the contract that he wants in writing that he will not have to transfer the security deposits over to me at closing. 

So basically if either of the tenant's decide to leave (on good terms) I will be responsible to return their deposit out of my own pocket. 

Not a horrible concession to give up but I don't really want to. I really don't want to lose the deal because its a cash flow cow, but I'm not happy about this arrangement. Should I drop it and just cave? Anyone have any creative suggestions to possibly reach a compromise? 

@Vincent Plant

I would not push the issue if you’re getting a good deal. Assess how much the damage deposits are, and then assess how good of a deal you’re getting. But also remember, at close you have to have the cash to open a separate account to keep their damage deposits in.

@Vincent Plant It is weird but at least you can calculate the financial impact. Always look at the whole deal don't get hung up on one aspect.

If its still a good deal then its no issue. Just put some money back for the 2 security deposits and consider it part of the purchase price. Then your covered later and you have accounted for this expense.

Check with your attorney. Not only is the security deposit supposed to be held in an interest-bearing accout, it's supposed to be transferred to Buyer at closing (with interest). Calculate how much interest the Seller owes, in addition to the security deposits.

I don't know if you can legally do that because the security deposit belongs to the Tenant, not the Seller. I suspect he probably spent it and doesn't have the money available to transfer to you.

If the property is that under-valued, that means they are probably bad tenants and you are probably already going to eat the costs of unpaid rent, cleaning, and damages. 

I guess it depends on how good the deal is.

I would ask for proof that the security deposits are even being held by the seller. Most likely he has spent them and is not holding them as required under the law.

You may want to have have it set up that the "security deposits" are returned (yes you may have to pay them now out of pocket) and have the tenants sign off that they got everything back. The when you own it terminate all TAW and offer a new on AND require the security deposit again.

Just my two cents

Get in writing how  much the deposits are (and have the tenants sign the document as well), then factor those costs into the purchase price.  I agree with others that the owner has spent the money even though it wasn't his to spend.

It is really just a concession the seller is requesting in the negotiation.

If your deal is $300,000 with 2 $1,500 security deposits; now the seller is effectively requiring you to have $3,000 more in cash settlement expenses. Don't worry about whether or not they are security deposits. They are line items on a HUD-1 and you need to ensure the tenants are whole at settlement. It doesn't matter who makes them whole in the deal. Evaluate the deal paying $3,000 more cash and negotiate accordingly.

In Ohio, it is required by law to transfer security deposit to the buyer (even if not in the contract). Find out the law in your area. Security deposits belong to the tenant. Don't concede on it.

The only reason I can think of the seller keeping the deposit is A:  He spent it or B the tenants were horrible and he figures he deserves the money for what he has put up with.

Depending on the deal this could work. But it's a strange request. If the properties are under market value this could workout. Just make sure you have enough money to cover the deposits if the tenants do move out in the next 12 months. And make sure that with the repairs needed you aren't over paying. Or you won't have any equity you can pull out with a HELOC or refinance in the near future.

I come across things like this all the time when I'm buying properties for myself or my clients. There is something going on behind the scenes where you're going to get screwed every time if you arent diligent. It's probably a combination of a broke owner, bad tenants, and little to no record keeping. 100% of the time I've seen something like this come up, the tenants have serious issues or move out unexpectedly. You'll likely get stuck with no deposit, a lot of damage, tenants that stop paying rent conveniently around the time you take ownership and then drag out the eviction process because you have little or no proof of deposits, leases, etc. Not having a good paper trail will only lead to more headaches. 

I write up my deals with clauses to handle all of that stuff now. Get an estoppel agreement and put it in writing that if rents aren't paid during the escrow process, that you're not stuck with the bill. I either do that or tell the owners that it needs to be vacant. Sellers, of course, aren't a fan of when I do this. So I politely remind them that if they're not trying to screw me then they shouldn't have an issue providing all of that in writing. If they are trying to screw me, that's fine, but I adjust my offer to reflect the cost of several months of lost rent, additional rehab, the costs associated with evicting the tenants, and getting it re-rented. It can be a 5-10k mistake if you do it wrong, so don't be afraid to stand your ground. 

I had a deal like this once.  I think it was through an Out-of-State Wholesaler.  The whole situation was a bit off because he was essentially acting like the seller's agent, except he wasn't an REA.  He was the only one I had contact with, until closing.

At any rate, I wrote up the PA with all the normal verbiage about pro-rated rent and security deposit being turned over to the buyer (me), at closing.  I had already been annoyed that the seller had foolishly only collected $300 for a SD, despite the rent being $1125.  He comes back to me that the seller said something like, "I knew she was going to do that!  That's too complicated.  I just want this simple."

Oh!  The seller wants it "simple"?  Not a problem!  We can keep it simple.  Including I don't have to pay her pro-rated property taxes at closing.  In Orleans parish, property taxes are "paid forward" so, normally, the buyer has to pay the seller the pro-rated amount of that at closing.  The guy paused for a second...I got the strong impression he had no idea what I was talking about...and said okay.  I added those clauses to the PA and everyone signed it.  Of course, I'd already done the math.  It was almost a wash, but I came out $57 ahead doing it "simpler".

@Vincent Plant

Have new tenants sign a new lease with you. They pay you a new deposit. The contract with their landlord is between them.

@Vincent Plant so what, if its a good deal you simply put the SD in the acct. Or get the seller to reduce the price by the amount.  KEEP IT SIMPLE !

Good luck 

Originally posted by @Judy P.:

Check with your attorney. Not only is the security deposit supposed to be held in an interest-bearing accout, it's supposed to be transferred to Buyer at closing (with interest). Calculate how much interest the Seller owes, in addition to the security deposits.

 No place I invest requires the security deposit to be in an interest bearing account. So that varies by state. In FL, if it is in an interest bearing account, part of the interest goes to the tenant. But it can be in a non interest bearing account.

@Judy P. The interest part is state law I believe. We do not have to pay interest on either in Louisiana.

@Vincent Plant This is a nonsensical request, but these are the types of requests you get with motivated sellers. Get over the principle of the matter and if it is a good enough deal, give the seller a credit. But know full well that you are likely responsible for the tenant's deposits after the Act of Sale at the point that they move out. So, operate under the assumption that you are getting charged twice. Of course, fall back on the lease and consult with your closing attorney.