What to do when Turnkey property seller kept tenant security deposit..

Question

I bought a duplex about three years ago from a turnkey company. They already had property management in place and I continued with that pm. I am in the process of switching to a new pm and I just found out the turnkey seller kept the security deposit for the tenants that were in there when I bought the property instead of having the pm hold onto that security deposit. What do I do? Do I have to cover the security deposit for the tenant from my own pocket? Should I try to reach out to the seller and get the security deposit back? Any help would be appreciated!

Bob S. · Answer

They cannot keep it its the tenants. Look at your HUD, did you get a credit for it ? If so then you have it . I know all PM cos in Cleveland, happy to help collect the SD

Corina Eufinger · Answer

You were likely given a credit on your closing statement. That constitutes you receiving the tenant security deposits. I do suggest you match up the leases to the closing statement to be sure you were given the right amount.

Drew Sygit · Answer

Review your docs!

Greg Scott · Answer

You should start with your Purchase & Sale Agreement. The PSA should have specified whether or not security deposits go with the property. If it said they don't, well, you are out of luck. If it says they do, then you should be able to get them back. If it says nothing, you are going to have a tough time.

Next look at your Closing Statement. Did the security deposits show up there? If they were being transferred, they should have shown up in the Closing Statement. If the PSA said they should be transferred and they didn't show up in the Closing Statement, the Title Company is responsible and Title Insurance may cover the loss. I'd start by reaching out to the Title Company and then the seller.

If the PSA says nothing, all you can do is call the seller and see if you can convince them it is the right thing to do.

FWIW, I'm a bit skeptical that the PM wasn't holding the security deposits. It could be you have an unethical PM hoping you walk away and leave them the security deposit. Look at the PM contract you inherited from the seller. It should state who holds the security deposit.

Amber Masterson · Answer

Thanks! That's helpful. I'll take a look in my closing docs for that.

Steve Donovan · Answer

Hi @Amber Masterson

I'm only familiar with Wisconsin, so I don't know if this might vary from state to state... Here, the security deposit(s) normally transfer from seller to buyer at the time of the property closing and are accounted for on the closing statement. Even if the former owner (the turnkey company) had the deposits held by the property manager, they would give you a credit for the amount of the deposits at closing. They then would have the property manager refund the deposit to them after you gave the deposit back to the PM. So, let's say deposit amount is $1500:

Seller gives you a credit for $1500 at closing and identifies this as security deposit transfer

You give the $1500 to the PM so it can have the funds available at time of move out

PM refunds the seller the $1500 that they paid you

Everyone ends up in the same position they were in (the PM holds the security deposit for the tenant but under your account)

I hope this helps and doesn't add to the confusion. All the best in your investing future!

What to do when Turnkey property seller kept tenant security deposit..

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