Seller didn’t transfer security deposits?

Question

I just purchased a multi-family rental property. The seller said they were all under oral agreements and no security deposits. After closing, one of the tenants said that they gave the previous (before this seller) a security deposit and that the seller recognized that their deposit was transferred to him. They have lost their written agreement with the seller, but they have a lease with the owner before the seller where they have a security deposit. We reached out to the seller but he stated he did not receive any deposits. Am I responsible for returning or to try to get their deposit? Or should they try to get it from any of the previous owners? The attorney is not getting back to us I guess he knows he is not getting paid to do the extra diligence.

Bob S. · Answer

Short answer, not your problem. You simply tell the tenant, you did not receive the SD, please take it up with the previous owner.  BTW I would bet the tenant is lying. Ask how they paid it? There has to be a record of it.

Russell Brazil · Answer

No you don't.

You contract should have dealt with credits for the security deposits. Unless your contract states anything about them, you are not due them, but you still take on the liability of owning them.

Allan Smith · Answer

Here's the deal.

#1 can't change the past. Need game plan starting from here.

#2 tenants lie. A lot. Especially to new landlords. The tenants can smell weakness, I swear.

#3 the tenant is talking about two sellers ago. Not buying it.  They need to have something in writing to show proof. When they move out, process it like there's no deposit. All they can do is take you to court. And with nothing in writing, the judge will throw it out

Alex Rodriguez · Answer

If the seller in fact didn’t know about the security deposit, but the tenant issued one to the owner before the seller had the property, do I have a legal claim to the seller? Maybe small claims? Whether it’s worth it or not is another issue, I just want to know the legalities.

Russell Brazil · Answer

You are the one who is ultimately responsible for the deposit.

Tenant could be lying or telling the truth. Previously owner could be lying or telling the truth. Both people could be telling the truth and owner simply had no idea the previous owner collected security deposits.

Alexander Rodriguez · Answer

I see where you are coming from, and you are right in the fact that I took a big risk in taking their word for granted. Thankfully this was the only issue. I did bring it up to the attorney, though two days before closing, I asked him if he can make sure none of the tenants have security deposits and written leases (I got that info from my realtor) and he said he doesn’t think so but he would check with the seller’s attorney. I didn’t hear back so I called back to confirm and he said there weren’t. He should’ve probably mentioned the estoppels at this point.

Chris Seveney · Answer

1. Sorry to say this, but this is not your agent or attorney fault. Should they have said something, probably, but this really is on you. It is the buyer who does all of the due diligence and they relay any issues/concerns or comments to the agent and attorney to act on their behalf, if you do not bring it up as an issue - then they do not know otherwise.

2. So if they have an executed lease, you pretty much have to abide by it. Most likely it has expired but whatever those terms indicate should be reviewed.

3. Financials - did you just take the sellers word for what they are getting for rent and expenses? Did you not get bank statements or anything from them or the property manager? What if they said it nets $5,000 a month but it only brings in $2,000 in rents and if expenses are $3,000/month not $1,000....

Not to sound harsh, but how did you even come up with a purchase price and know if this property is worth the investment?

Alexander Rodriguez · Answer

I did not get estoppels. I feel like this should be my agent’s and attorney’s fault frankly. They are hired to guide buyers through the process. I just learned that it exist and what it is for.

2. The seller said they had no written leases. Only one tenant came up with a Lease and it’s from the owner BEFORE the seller had the property. So two owners before me.

3. Not sure what financials you are referring to. The seller said they had no deposits.

I know this is a tricky situation. If they come up with a Lease from the seller I’m sure I can get it back, since he is a realtor and I can put a complaint if he was not honest. The thing is that there is only a lease from the owner before the seller had the property, so there is not really proof that the seller really had the deposit. So I’m not sure if I have to return the deposit? Or let the tenant figure it out? Can they sue me if there is no proof that the seller who sold me the house had a security deposit?

Chris Seveney · Answer

Few questions:

1. Did you get estoppels?

2. Did you get copies of the leases from the owner for the current tenants?

3. Did you get copies of the financials including any funds held in escrow?

You are now going to be caught in a he said / she said situation where they could sue or file a complaint. If they have a lease that says there is a deposit, then most likely you are gonna be on the hook for it. You can try and go to the seller but its gonna be too late and cost you more to chase the money than what it is worth. The other factor is that money for how long they have been a tenant needs to be in an interest bearing account so you will have to account for that...

Kevin Sobilo · Answer

@Alex Rodriguez, first off, did you learn anything yet so that you aren't in this situation again next time?!?

The proper way to address this during the sale is with estoppel forms. The owner and tenant attest to the status of their rental agreement. So, that you KNOW what that is and can be sure EVERYTHING is handled at closing. If you had done this any deposit claim would have been handled before closing because the tenant would have said so when asked to sign the estoppel form.

I would tell the tenant that they have to go after the previous owner which will be VERY hard to do without documentation. Even if your state's laws in any way make you responsible, the tenant could not at this point even show they paid a deposit and you can show you never received it. So, I don't see how legal liability would fall on you in the end.