Who pays back security Deposit?? Seller or Buyer

Question

I just closed a wholesale deal where the seller was selling the property with tenants in place. Found a buyer and closed the deal, but now the buyer wants to know who is responsible for the $400 security deposit the tenants gave when they first moved in? The seller or the new owners?

All opinions welcome.
Thanks in advance

All opinions welcome. 
Thanks in advance

Jon Holdman · Answer

The owner of the property  owes it to the tenants.

It should have been a credit from the seller to the buyer at closing.  Whether it was or not, though, the new owner (buyer) owes it to the tenants.  Its not the tenant's problem to collect from the seller, its the buyer's.  Since you were in the middle, the buyer may come after you.

Ralph R. · Answer

@Mike Nguyen  @Rich Ng is correct  its your job as the buyer to CYOAF.  if you bought a property without checking the HUD report to see if you got the proper credits its a lesson learned.  That includes rent, tax credits and deposits.  In Colorado they are very strict about deposits.  A call to the Dept of Regulatory Agency's mite light some fires.  Maybe your state has some similar agency that governs realtors and makes rules concerning rent deposits??  The realtor should have known these things need to be addressed and should have advised you to have an estopple signed.  Unfortunately when you buy a tenanted property you buy the responsibility of the lease as well.  Unfortunately this includes deposits and rent terms and rates.  In the end, its always your job to protect yourself.  Trust but Verify.  RR

Rich N. · Answer

@Mike Nguyen Any bank that will allow you to open a landlord/tenant interest bearing account.  I try to find the one that will allow me to open it without the presence of the tenant. Only using a copy of an ID, copy of the lease and an IRS W9 document.  This way I open it around my neighborhood.

If you do not have that ability, then perhaps one near your property area so you can have the tenant show up there by themselves.

I think this was more prevalent when the interest rates were higher and did not want the interest attached to my SS number and I paying taxes on it.

Lucky you, that it is in the paperwork because then its really not your problem. The title company will try to get it from the seller but if they can't, after a certain amount of time, they should give you the money as they are the title company (at least that is my understanding).

I do not have an attorney or a tax expert.

Rich N. · Answer

@Mike Nguyen

for this case, you need to let this run its course with them trying to get it back.

My understanding is that the Security Deposits and Last Month escrow accounts is the responsibility of owner of the property.  When you close, it should be either transfer to you or applied as a credit in the HUD.  In your current case, it wasn't properly handle so your in limbo.

For the future, look into Tenant Estoppel.  Essentially, I supply a form for each tenant to complete and it a requirement for them to complete as part of the closing....the seller has to make it happen.

Jeff S. · Answer

Did you look at the closing statement? Chances are it is in there as the closer should have had the rental agreement to pass onto the buyer, along with an assignment of it. Check it out, inform buyer.

Jason Crowe · Answer

I have this issue.  Seller discloses that the property security deposit is $1500 and the deposits do not add up based on leases provided.  I've disclosed this to the Realtor who is a transactional broker in this relationship between me and the seller. They have not acted in a timely manner to reply back about the issue and solution or indicated it to the seller as far as I know.  Isn't under FL law this would be against the rules if ignored as seems in an email when asked?

Also, what should be done in the situation.  Granted the amount is not very significant but still this could cause an issue with the tenants due to unclear documentation and transparency. Suggestions?

Estoppel?  I saw this up top but don't know how this should be accounted for.  One realtor in this transaction.  Please don't reply I need a realtor on my side, this is not the solution I need.

Mike Nguyen · Answer

@Rich Ng, @Ralph R. Jeff Beard  Thank you all, especially for the Tenant Estoppel. I did look at the HUD before the closing, brought up the issue about the deposit but was told by the person that sent me the HUD that the deposit would be taken care during the closing. The seller(s) seemed to be "experienced" ones, with LLC formed, attorney looking at the contracts. Based on the contract, the credit from seller for fixing outstanding issues with the house was maxed out based on the law (2%) so I am not sure if that can have any effect on the credits for deposits or prorated rents.

@Rich : I don't get what you mean about the LM and SD funds. Could you help me clarify them?

I can see I probably have to take a loss for this lesson. On the side, I don't fully get their motivation behind giving me defective/fake keys to the house. What do they really gain?

Brandon Coutts · Answer

A guest on one of the podcasts talked about how he does a 500 dollar move in fee instead of a security deposit. I thought that idea was interesting. As long as you screen your tenants properly they typically don't do more damage than that. It is also cheaper for the tenant since they don't need to come up with the typically larger security deposit. Just a thought.

Mike Nguyen · Answer

@Rich Ng   Thank you very much for the steps on handling the deposit with the tenant. I will look into more in New Hampshire for this topic. Do you have any suggestions on where to open escrow accounts and any fees associated?

As an update, since the deposits and prorated rents are mentioned in the sales contract, the title company is adjusting the HUD and now going after the previous owners those items. Still, I don't know if they have any luck getting the response from the sellers.

When I said "experienced" ones, I meant they probably know the laws much better than me and are trying to use the loopholes to take advantage of new investors like me. If you have any attorney in mind (perhaps with hourly fee), please let me know. I am interested in learning more about the legal and tax aspects of rental properties. Topics in BiggerPockets here are helpful but people do have different opinions, ex on whether having LLC or Land Trust provide good protection.

Rich N. · Answer

@Mike Nguyen

Sorry couldn't find it.  But here you go....for Massachusetts.

1. before they move in, Have a Statement of Condition report where you state what the place is looking like and they respond back on  the same form as to what they see....you both sign it.

2. take their funds and open a separate escrow account stating they are the tenant and you (or entity) is the landlord/property manager.

3. provide proof to the tenant stating the account number and the bank address.

4. annually give them the interest back or have them deduct it from the 1st month of the new lease.

5. when they actually leave, I think you have either 14 to 30 days, you must give them a statement of account. ie. Tenant gave $2K, plus 5 cent interest, minus repairs of $1 dollar = $1,999.05 check.

* note - any minus must be (like the $1 example above) must have a receipt/proof of actual cost.  You can not say I charged you 50 dollars for whatever !

Who pays back security Deposit?? Seller or Buyer

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