Tenants Did not pay Deposit

Member since 2020 · 49 posts · 40 votes

I'm taking over a building and leaving the tenants in the space. They are all long term tenants (newest is 2 years). The leases are now month to month. They said they have not given any security deposits or similar. If you were taking over a place, would you now charge your tenants' security deposits? And if so, how would you do this? Slowly over a few months? I'm already planning on raising rents closer to Market rates over the next 2 years, so they will already be getting some increases.

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Mike CumbieBusiness Member

REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes

As far as the deposit goes, I most likely would not try and add one at this stage. There is nothing you can say about the condition when they moved in. Hole in the back of a door? "Yeah that was there", Missing drain pipe "It was like that" and you will have nothing to go back to. If you go to an established tenant (5 years) and say "Hey I need an extra months rent to hang on to" They will start off defensive already.

Just my 2 cents and good luck!

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Tom Mills
Rental Property Investor · Raleigh, NC · Member since 2014 · 30 posts · 9 votes
6y
I have a similar situation with a SFR I just purchased. I am having them sign a 3 month lease to get something in writing and it will go month to month afterwards. I decided to have them pay a security deposit, but allowing them to pay it over a few months period.
1 Reply
Mike McCarthy
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
6y
@Xela Batchelder getting a deposit over a few months is probably the best idea, but also consider how long they’ve been there and what you’ll do with the deposit when they do move out. If they’ve been there 5+ years, I might just consider raising the rent an extra $10 or $20/mo and ditch the deposit. The apartment is probably going to need a refresh anyway, and I’d rather have the money in my pocket as opposed to having to give it back - not being able to prove that they broke the closet door, etc.
Just something to consider.
4 Reply
Xela Batchelder
OP
Member since 2020 · 49 posts · 40 votes
6y
@Mike McCarthy That makes sense. Thanks!
2 Reply
Xela Batchelder
OP
Member since 2020 · 49 posts · 40 votes
6y
@Tom Mills Why are you keeping them month to month, and not doing a year lease?
0 Reply
Mike CumbieBusiness Member
REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
6y
@Xela Batchelder Month to month makes it easier for you to get them out as well. If you find out they are not paying, calling all the time over their neighbors music, get put on the sexual predator registry, you can simply non renew.
1 Reply
Mike CumbieBusiness Member
REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
6y
As far as the deposit goes, I most likely would not try and add one at this stage. There is nothing you can say about the condition when they moved in. Hole in the back of a door? "Yeah that was there", Missing drain pipe "It was like that" and you will have nothing to go back to. If you go to an established tenant (5 years) and say "Hey I need an extra months rent to hang on to" They will start off defensive already.
Just my 2 cents and good luck!
5 Reply
Tom Mills
Rental Property Investor · Raleigh, NC · Member since 2014 · 30 posts · 9 votes
6y
Lot's of great comments. Did a 3 month to test the waters so to speak with the new relationship. They have been there 5 yrs and pretty much did whatever they wanted with the property. I wanted to get my lease in writing and if everything goes well, have them sign a year lease with a slight increase. They recently were awarded a $50 a month rent decrease by the prev owner, and it is well below market rent.
2 Reply
Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Xela Batchelder. I would definitely get a deposit over the course of 3-4 months, IF they decide to stay that is. First, I believe in getting market rate rents asap. So, they may decide they want to leave anyway. Also, I don't believe in keeping tenants just because they have been there for 5 years. There are lots of great tenants out there, that pay market rate rents. If they decide to stay, get the deposit payments and a new lease in writing. And, give a full scale "Move in Checklist" for every unit, as that is the condition you will use for their deposit when they do move out.
4 Reply
Xela Batchelder
OP
Member since 2020 · 49 posts · 40 votes
6y
@Tom Mills Great idea! Like the testing the waters part.
3 Reply
Xela Batchelder
OP
Member since 2020 · 49 posts · 40 votes
6y
@Mike Cumbie Those are some great points. So makes sense IF one were to collect a deposit, one would need to re-evaluate everything from this point forward. But that does sound like a pain.
2 Reply
Xela Batchelder
OP
Member since 2020 · 49 posts · 40 votes
6y
@Anthony Wick Yep, great idea to do a "move-in checklist" if collecting a deposit. Great points!
0 Reply
Suzanne PlayerPro Member
Attorney · New York City / Long Island, NY · Member since 2020 · 597 posts · 248 votes
6y
You might not be able to prove what condition the unit was when they moved in, but what if they do damage from this point forward?
If you have photos and a description of the unit as it is today, then any damage done in the coming months/years that the tenant remains will be obvious to you. (In which case you would have proof that the damage was done by them, and could look to the tenant for payment.)
A security deposit payable over a few months (to make it easier on the tenants) could be taken (after documenting the unit’s current condition with the tenant) to protect you going forward. Check with your attorney for legal advice on what’s allowable in whatever state & municipality your building is located in, whatever you do.
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1 Reply
Fikret Sivac
Chicago, IL · Member since 2017 · 25 posts · 24 votes
6y
@Xela Batchelder when we bought the building the tenants were there already 27 years. My lawyer wanted them to sign a document stating if they had a security deposit with the seller and how much. I requested a security deposit when we took over but I let them know through the seller's lawyer ahead of time. Thinking about it the security deposit was a waste. No way could I charge them for the damages caused over the 27 years. They moved out after 3 years completing 30 years. I don't think it would hold up in court if we went that way. Chicago doesn't let you use the security deposit as last month's rent. Chicago requires you to hold that money in a separate account incruing pennies as interest.
1 Reply
Lee Mast
Rental Property Investor · Fort Collins Colorado · Member since 2019 · 30 posts · 24 votes
6y
@Xela Batchelder I would inspect the apartments and if they are taking care of the place, leave well enough alone and slowly work on raising the rents over time. Having good long term tenants is more important than that security deposit... after all, we've all heard horror stories of tenants trashing a place far beyond what a security deposit can cover.
0 Reply
Dana Baggett
Rental Property Investor · Kingston Springs, TN · Member since 2016 · 10 posts · 28 votes
6y
I would make sure contract says deposits will be transferred to new owner. I might give people a defined timeline to get deposit in if there were no established deposits in place. Inherited tenants never work out, you will need the money.
0 Reply
Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
6y
It is up to you to decide if you can handle the worst case scenario where they dig in and refuse. Are you ok with an eviction?
0 Reply
Account Closed
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
6y
@Xela Batchelder
If you inherited tenants with the property, then you inherited their lease. What does their lease say about deposits? Is there a chance the person selling the property took the deposits and just isn’t passing them along to you through the sale?
0 Reply
Aigo Pyles
Flipper/Rehabber · Memphis, TN · Member since 2020 · 758 posts · 285 votes
6y
@Xela Batchelder
You can write them a letter regarding the security deposit.
0 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
The best technique is to rip the bandaid. These tenants are likely below market rent, no deposit, no lease agreement, and they've been there a long time. Those are all signs that you probably have below-average renters.
Personally, I would determine market rate and then give the tenants notice that IF they want to stay, they will have to apply and meet my screening process, pay a deposit, sign the lease, and pay market rent.
I also require a detailed inspection of every unit (if you haven't already) to document the condition with pictures and/or video so you can hold them accountable from this point forward.
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Anna Sagatelova
Property Manager · Cleveland, OH · Member since 2019 · 446 posts · 566 votes
6y
I think it's smart you are evaluating the inherited tenants before making major moves or major commitments, but the tenants, by virtue of having been there for a number of years and having current possession, already have the upper hand here.
If these are tenants you want to keep and you can agree to a monthly rent that works for both of you, I think it's a good idea to almost treat this as a brand new lease. I don't think you'll be able to require screening of them as if they are new (check your state laws but again, they already have possession), but the lease can be a brand new lease with the security deposit covering damage from this point forward. The catch is that you have to truly painstakingly document the current condition of the property, which is MUCH harder to do with a property that's had 2+ years of "life" in it. You simply won't be able to see everything like you would in a vacant empty unit.
Overall I think it is easier on everyone to forgo the deposit at this point; if you are electing to keep them, they must be taking care of the place (I would hope...) and if they haven't wrecked the place in 2+ years, they aren't likely to start now. Monthly rent, that you keep forever, is the thing to focus on as far as payments go.
1 Reply
Xela Batchelder
OP
Member since 2020 · 49 posts · 40 votes
6y
Originally posted by @Anna Sagatelova:
I think it's smart you are evaluating the inherited tenants before making major moves or major commitments, but the tenants, by virtue of having been there for a number of years and having current possession, already have the upper hand here.
If these are tenants you want to keep and you can agree to a monthly rent that works for both of you, I think it's a good idea to almost treat this as a brand new lease. I don't think you'll be able to require screening of them as if they are new (check your state laws but again, they already have possession), but the lease can be a brand new lease with the security deposit covering damage from this point forward. The catch is that you have to truly painstakingly document the current condition of the property, which is MUCH harder to do with a property that's had 2+ years of "life" in it. You simply won't be able to see everything like you would in a vacant empty unit.
Overall I think it is easier on everyone to forgo the deposit at this point; if you are electing to keep them, they must be taking care of the place (I would hope...) and if they haven't wrecked the place in 2+ years, they aren't likely to start now. Monthly rent, that you keep forever, is the thing to focus on as far as payments go.

Yeah, I had planned and had already put in offers asking for spaces to be vacated (from what I learned here on Bigger Pockets), but when touring the place, the tenant's apartments were so tidy and meticulous. Since they seemed to be caring for the place, I decided to try keeping the tenants. I'll have to slowly raise rent on them (with one larger jump at the beginning), but they all know they are underpaying, so it won't be a surprise to them. Thanks!

2 Reply
Xela Batchelder
OP
Member since 2020 · 49 posts · 40 votes
6y
Originally posted by @Nathan Gesner:
The best technique is to rip the bandaid. These tenants are likely below market rent, no deposit, no lease agreement, and they've been there a long time. Those are all signs that you probably have below-average renters.
Personally, I would determine market rate and then give the tenants notice that IF they want to stay, they will have to apply and meet my screening process, pay a deposit, sign the lease, and pay market rent.
I also require a detailed inspection of every unit (if you haven't already) to document the condition with pictures and/or video so you can hold them accountable from this point forward.

When do you start sorting out the new leases? Before closing? After closing? One month in?

Thanks!

0 Reply
Xela Batchelder
OP
Member since 2020 · 49 posts · 40 votes
6y
Originally posted by @Account Closed:
@Xela Batchelder
If you inherited tenants with the property, then you inherited their lease. What does their lease say about deposits? Is there a chance the person selling the property took the deposits and just isn’t passing them along to you through the sale?

Yes, from these comments, I know I'll have to make sure to get it in writing to confirm that they did not collect deposits, and maybe from the tenants too. (What do you think?) I have not seen the leases yet, when do I ask for these? (This is new to me!) We haven't finished the sale process, we are still waiting for inspection.
0 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
You can't sign any legal contracts until you own the property. I would provide the renters with an introduction letter on the day of closing. Let them know you are the new owner, how to pay rent, how to report maintenance issues, how to communicate with you or your manager, etc. I would give them a second notice with the timeline of changes so they know what to expect regarding screening, deposit, rent increase, etc. I would not give them more than 90 days notice. 60 days is plenty of time for them to think about it and then find another rental if they decide to move. Check your state laws to see what is permissable.

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Account Closed
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
6y
@Xela Batchelder
I would suggest that you ask for copies of the leases now. You definitely need to see that info before you close.
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