Seller won't give up security deposits at sale

Cedar Rapids, Iowa
Legal & Legislation
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Seller won't give up security deposits at sale

Troy F.Pro Member
Investor · Asbury, IA · Member since 2018 · 80 posts · 29 votes

Hello,

I've purchased a few properties now and this is a first. We are 8 days from closing and the seller's realtor informed me that we would not be getting the security deposits as that was not written into the contract. I've been asking about the security deposits since prior to contract signing. I noticed the seller's realtor seemed to be sidestepping the question. I just thought he was busy and didn't have the details, so he hadn't responded. Today he finally laid out their intent. These are section 8 tenants. Those security deposits belong to the tenants, not the seller, or the buyer. Have you ever heard of a seller trying to keep the security deposits before?

Thanks,

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Jill F.
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
1y

check your state laws. Some state regulate what happens to a security deposit when a property transfers. It looks like iowa regulates the transfer:

https://ipropertymanagement.com/laws/sold-property-security-...

Even if you don't have specific language regarding the security deposits if the leases transfer I would expect the security deposits to transfer as part of the lease. I think the section 8 administrator would have something to say about it. Do they have a better offer? are they trying to derail the closing?

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    1y

    You need to have had it in the contract. This was an oversight by either you or your agent.

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  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    1y
    Quote from @Troy F.:

    Hello,

    I've purchased a few properties now and this is a first. We are 8 days from closing and the seller's realtor informed me that we would not be getting the security deposits as that was not written into the contract. I've been asking about the security deposits since prior to contract signing. I noticed the seller's realtor seemed to be sidestepping the question. I just thought he was busy and didn't have the details, so he hadn't responded. Today he finally laid out their intent. These are section 8 tenants. Those security deposits belong to the tenants, not the seller, or the buyer. Have you ever heard of a seller trying to keep the security deposits before?

    Thanks,


     He either has to give you the deposits or he has to give you a line item credit at the closing for the amount of the deposits, so that you can set aside the resulting credit money.

    The funds are NOT his. He holds them in trust and cannot take ownership of them until a future event has occurred: A charge related to the tenants' leases for breach or excessive wear and tear, etc.

    No credit, no physical transfer, no closing. He cannot force you to buy a lawsuit, which is what you would get from the tenants. Have your lawyer send a nastygram to his lawyer.

    2Reply
  • Jeff Roth
    Real Estate Consultant · Ann Arbor, MI · Member since 2022 · 476 posts · 266 votes
    1y

    Hi Troy in Cedar Rapids, Iowa-

    You are days away from closing on an investment property and the seller and their agent are saying they are not going to return the security deposits and tell you it should have been written in the purchase agreement. I am sorry this is happening.

    There are many things that happen that are not in the purchase agreement like the seller turning over the keys to the property at closing. While I agree having it in the contract would keep this from happening, you are correct in saying the security deposits do not belong to the seller. In fact, in many states, the seller cannot commingle the tenant's security deposits with other funds and the tenants must be told which financial institution their security deposits are held.

    Finally, because the tenants are section 8, the local housing authority may also be helpful in resolving this with the seller.

    To Your Success!

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  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    1y

    @Troy F. Contact the listing agents managing broker immediately and if you don’t get a satisfactory answer immediately contact your state and local real estate boards.

    Delay the closing until this is resolved.

    I’ve never put in a contract anything about the security deposits. My last deal was my first off market deal and when I contacted the sellers wife about the deposits she said that that was a given as part of a multi family sale and they’d write me a check at the closing as I requested because money was tight and I didn’t want a credit where I’d have to come up with the funds out of pocket later.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    1y

    The security deposit belongs to the tenant. So if they aren't passing it to you to hold, they need to return it to the tenant.  If they return it to the tenant, then the tenant needs to give you a new deposit.

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  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    1y

    You’ve received some insightful replies already. Here are some thoughts.

    How big of a discount did you get on your purchase price?

    Did your discount make it worth your time to buy it anyways? 

    Are you prepared to kill the deal if the seller does not give you additional discounts/credits or security deposit credited to you?   

    There might be a way of putting pressure on the seller without going totally nuclear. If the seller wants you to buy more than you want to buy, you do have some leverage.

    Also, how much security deposits are we talking here?

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  • Ken M.
    Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
    1y
    Quote from @Troy F.:

    Hello,

    I've purchased a few properties now and this is a first. We are 8 days from closing and the seller's realtor informed me that we would not be getting the security deposits as that was not written into the contract. I've been asking about the security deposits since prior to contract signing. I noticed the seller's realtor seemed to be sidestepping the question. I just thought he was busy and didn't have the details, so he hadn't responded. Today he finally laid out their intent. These are section 8 tenants. Those security deposits belong to the tenants, not the seller, or the buyer. Have you ever heard of a seller trying to keep the security deposits before?

    Thanks,

    Those landlords, why, they'll try anything.
    Seems to me the seller believes it belongs to him or worse yet, he's already spent the money and doesn't have it to turn over. I'd think that would be theft from the tenants, but hey, let's see how this plays out.
    0Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    1y

    It does not matter what the seller wants. Or the listing agent.

    If you have a provision on assigning leases to the buyer and transferring security deposits in the Offer To Purchase (in Wisconsin that's part of the standard form) the title company will put the SD as a line item on the closing statement. End of story.

    I can't imagine the Iowa State contract does not have a similar provision!? Without it the lease would remain between the previous owner and the tenant, you would not even be entitled to rent...

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    1y

    I'd also talk to section 8 to let them know you are buying it to ensure you get the rent for March.

    1Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    1y

    check your state laws. Some state regulate what happens to a security deposit when a property transfers. It looks like iowa regulates the transfer:

    https://ipropertymanagement.com/laws/sold-property-security-...

    Even if you don't have specific language regarding the security deposits if the leases transfer I would expect the security deposits to transfer as part of the lease. I think the section 8 administrator would have something to say about it. Do they have a better offer? are they trying to derail the closing?

    3Reply
  • Peter Falk
    Real Estate Broker · Madison, WI · Member since 2015 · 118 posts · 60 votes
    1y

    Assuming the leases clearly state a security deposit amount, the seller knows that the tenant will be wanting a refund when the lease ends (after closing) so should be an easy reminder that you need those funds credited to you at closing from them to refund to the tenant when needed.

    If the seller spent the tenants deposit, at least the credit to you at closing comes out of the sales proceeds (seller just nets that much less at closing) and assuming they have sufficient equity should not be a big deal.  

    Wisconsin has a 21 day timeline for landlords to account for any damages and refund the deposit, so if your State is similar, could also remind the seller of those statutes and that you can't just ignore these funds (like pro rating any rent the month of closing where you should be entitled to the portion from closing to the end of the month)

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  • Matt McCurdyBusiness Member
    Real Estate Broker · Cedar Rapids, IA · Member since 2019 · 143 posts · 56 votes
    1y

    @Troy F. speaking from experience as a licensed real estate broker in Iowa and in the Cedar Rapids MLS, the Cedar Rapids purchase agreement specifically calls out a clause if the property is a rental property (Y or N). If so, is prorated rent being transferred (Y or N) and is the deposit being transferred (Y or N). Let me know if you'd like me to review the purchase agreement for you (as a free consultant, no agency implied) and I can give you my interpretation. This has been one of my biggest gripes as a broker is the inconsistent purchase agreements/forms (in general) across the 13 associations in Iowa.

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  • Gustavo Delgado
    Houston, TX · Member since 2015 · 261 posts · 170 votes
    1y

    security deposit are the tenants, not the owners. He needs to transfer these amounts at closing because your new tenants will ask for them if and when they vacate

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  • Troy F.Pro Member
    OP
    Investor · Asbury, IA · Member since 2018 · 80 posts · 29 votes
    1y

    Good news everyone. He has agreed to transfer the security deposits at closing. Your insight helped me stick to what I and my realtor knew was right. The referenced website on IA law regarding security deposits was most helpful. 
    Thanks BP!

    2Reply
  • Jared HottleBusiness Member
    Real Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
    1y

    Did this get resolved? Our board of realtors approved PA has this built into the purchase agreement even if you did not specifically ask for it. Seems like a weird thing for a seller to hold on to as technically it is not his and seems like he could be opening himself up to liability. However that being said if the deal is good it is just a minor inconvenience for you and best to move on. Thats my opinion anyway.

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