"Rent lock" instead of deposit?

Question

Hi all,
It's my first BP question, I hope that someone has some experience that can help.

I'm ready to buy a multi-family property that is currently rented, but most of the leases have something called Rent Lock instead of a deposit.  The owner and wholesaler tell me that it's perfectly normal to charge this kind of initial FEE, and that it'll never have to be refunded by the potential new owner -- me.  But when I Google the expression, and BP it as well, I can't find a single reference to it.

Has anyone used it or run across it?  Any opinions that you'd like to share before I finally buy this place?

Thanks!

Dawn Anastasi · Answer

I think this was a term the landlord made up in order to advertise "no security deposit".

Amy Davidson · Answer

Michael, you really summed up what I was thinking, unfortunately.  It's a D+ neighborhood and I imagine the tenants don't have so much legal experience or so many choices -- easy to take advantage of.

I was hoping that the answers would put my mind at ease, but it does indeed seem this is a sketchy practice, by someone better avoided.

Thanks everyone!

Matt Devincenzo · Answer

I've never heard of it, but from your description sounds kind of like when some owners charge a pet fee instead of a pet deposit.

If an atty says it is legit I would ask for the fee credit pro rated to you. So if they paid $400 6 months ago you should get a $200 credit at closing. I would also insist on signed estoppel agreements from all the current tenants that in a paragraph describes the fee and they sign that it meets their understanding of what they were charged.

The way it is now they initialed next to an amount but it doesn't describe what that really means so I'd want it spelled out and signed so everything is clearly understood by the tenants as well as you.

It does sound fishy to me though....

Michael Seeker · Answer

Can you provide the wording in the lease that explains what the "Rent Lock" is?  If it is some sort of non-refundable fee they charged the current tenants, I don't see how that would get transferred to you upon sale.  Sounds pretty fishy to me.

David Beard · Answer

Amy Davidson - I'd also suggest that you really pause and consider if you want to own property in a D+ neighborhood.  This type of investing is typically for people that are experienced at managing this tenant class.  These kinds of properties are also hard to finance, often suffer from deferred maintenance, and typically have very high expense ratios due to turnover and unit damage.  For example, you might only take home 30-35% of the gross potential rent.  If you get tax returns and solid info that tells you this property is doing better than this, and the property has little or no deferred maintenance, then it might be worth considering.

If this property appears to be a 13 cap, for example, but you can find a 10 cap in a clearly better area, then I'd go with the latter, which will provide a better risk-adjusted return with more stability in net income and better resell value.

Tenants in D+ neighborhoods rarely get their sec deposits back anyway, usually due to excessive unit damage, or the fact that they are eventually evicted or bail out on your with unpaid last month rent.

Steve Babiak · Answer

Let's say that a "rent lock" is legitimate (sounds fishy, since that is what a lease does anyway for the lease duration at least).  What's to keep the tenants from damaging things, since they have no deposit to be returned to them?  After all, that is the purpose of a security deposit in the first place - to give the LANDLORD some protection against tenant damages, not to give the tenant some protection.

Kyle J. · Answer

Never heard of it either. It's definitely not "normal", but whether or not it's legal would depend on your state's law.  I would consult a local attorney to get their opinion.

Also, since this "fee" is not explained or defined in the lease, I would get an estopple agreement from the tenants which clearly states that no refundable security deposit was collected/paid.

You don't want them coming back at you for this fee/deposit down the road, especially since you're not even sure what it is.

Michael Seeker · Answer

This is definitely not normal practice and is borderline fraudulent at best - I'm sure it's illegal in some areas, but might barely squeek by as legal in others.

As you mentioned, the terms of the lease outline the rent and the period.  The rent cannot change during the stated period (unless otherwise noted in the lease).  It sounds like these people are scammers and look to take advantage of tenants...why wouldn't they be trying to take advantage of you as well?

George Paiva · Answer

huh? rent lock?  some kind of shenanigans from the looks of it.  I'd be very wary about dealing with these guys.

Amy Davidson · Answer

Believe it or not, it never even crossed my mind to speak to an attorney.  Funny.  I suppose that I ought to go find one.

"Rent lock" instead of deposit?

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