Seller Never Collected Security Deposits

[Renard Miller]

I am in the final stages of purchasing a fourplex in Virginia and wanted to see if others had any thoughts on what my options are. In the future, this will be a question I add to my diligence checklist, but in this instance, is it reasonable to ask the seller to make a purchase price concession to account for the missing security deposits? The seller simply did not collect security deposits for three of the four units and did not mention this fact at any point up until now. 

As security deposits are the tenants money, it is not necessarily a perfect solution to ask the seller to cover these amounts, but it also creates great risk on my end if there are no security deposits in place. 

As I see things, my options are: (i) eat the cost; (ii) have seller adjust the purchase price down by some agreed upon amount; (iii) have seller write a check for the missing security deposits; or (iv) have inherited tenants pay a security deposit when we take over the property. None of these seem perfect, but I am wonder if there are reasons one might make significantly more sense than the others. 

Would love to hear any thoughts on the matter. Thanks in advance!

[Jennifer Beadles]

I've had to deal with this before. Never a perfect solution but for good deals sometimes we have to deal with sellers who weren't great landlords.

Did the leases state that deposits were collected? If so I think you have a really strong case for having the seller pay you since it was their error.

Once I receive leases I always get the seller to sign an addendum authorizing escrow to withhold deposits and pro-rated rents and list out the amounts.

[Renard Miller]

@Jennifer Beadles that is a very helpful point re: the leases. I will have to go back through each and check. I know that our sales contract contemplates the security deposits being transferred at closing, which would have been a better time to bring up that the seller did not collect them. Hopefully we can recover some amount, but at worst, this is a relatively cheap lesson for future deals. 

[Josh C.]

It's common for there not to be any. But as stated above. Deals come with issues. I doubt he'll write you a check for missing "deposits" or you going to give the tenants money they gave you? I doubt it.

[Sara K.]

How do the units look on the inside?

We are also in the final stages of purchasing a property. There is a security deposit, which will be transferred to us, but in our case, I wouldn't worry too much if there wasn't one. The tenant is very clean and orderly, plus we're planning a gut job after this tenant leaves, in order to update the unit and get market rent. 

[Renard Miller]

@Josh C. Definitely understand that. It's just that there is some inherent value in having security deposits in place. The implied value of that is not 0, so when the sales contract contemplates them, it does not feel unreasonable to seek compensation. But you are right that the most likely outcome is a lesson learned. 

@Sara K. The units are decent inside and the tenants do not appear to be an issue. I guess my thinking is that if X% of security deposits wind up being kept by the landlord, there is some value to what is missing. 

[Todd Dexheimer]

I would ask him to give you a concession or to have him place money into an escrow account that you can draw on if there is documented tenant damages, this would allow him to be reimbursed and you to be protected.

[Renard Miller]

Thanks @Todd Dexheimer. An escrow account would be a good solution if he's unwilling to just offer some sort of concession. 

[Wayne Brooks]

Your contract called for the seller to transfer any deposits he was holding. He was holding none.....end of story.

[Ben Higginbotham]

Seems to me that if your sales contract says that you are to receive the security deposit then you are entitled to an amount equal to what the leases state, if they say that an amount was collected and he did not collect then shame on him, if the leases say that $0 security deposit was collected then shame on you for not catching it move on with life.

[Renard Miller]

@Wayne Brooks It definitely is if I accept that it is. Just wanted to see what my options might be. Thank you for your contribution. Cheers!

[Renard Miller]

@Ben Higginbotham Seems like a reasonable summation. Thanks. 

[Joe Splitrock]

@Renard Miller I have seen cases where a landlord either didn't collect them or traded services for the deposit. For example, you clean the unit and I will waive the fee. I have also seen landlords take the deposit for rent, which can be dangerous to you, because on move-out the tenant may expect the money.

Looking at the leases is a good starting point, but I would also request an estoppel from each tenant. Essentially the tenants agree rent is $XXXX and security deposit is $XXXX or $0 in your case.

I would be less worried about no deposit and more worried that the tenants agree.

As far as your agreement stating all security deposits are transferred at closing, if there is $0 security deposit then that is what is transferred. So that clause by itself doesn't guarantee there is any money. 

Make sure the leases and tenants agree. If  the lease states any security deposit, then it must be 100% transferred. Don't let the landlord try to tell you they are withholding it for rent or damage, it all goes to you. 

[Joe Splitrock]

Originally posted by @Wayne Brooks:

Your contract called for the seller to transfer any deposits he was holding. He was holding none.....end of story.

Not necessarily. I have seen landlords try to with hold deposits by claiming a tenant owed them money and they agreed to take it out of the security deposit. If the lease states a deposit, then the buyer should get it. If it states nothing, then that is what the buyer gets.

[Patrick Liska]

Agree with @Joe Splitrock, find out what the leases say, if a security deposit was given, if it does not say anything and the seller is saying there is no security deposit collected, get it in writing from each tenant ( make sure that all tenants that signed the lease, sign the agreement that there was no deposit given) you will then be off the hook for the security deposit when they leave. i had this with two houses i bought with inherited tenants and did just that with them.

[Patti Robertson]

Renard Miller - I would chalk this up to a rookie mistake. That doesn't mean you shouldn't ask for the seller to make a concession. It never hurts to ask. But in the future make sure you specify what information you want to see on the rent roll before you make your offer. I see New Landlord's make lots of mistakes just by not asking the right questions and frankly working with agents who are not investment specialists, so they didn't advise them on the questions to ask. You always need to ask that security deposit be included. You also need to know what utilities, if any are owner paid. I also like to know the status of each tenant ledger. Are they current? When did they start and when do they end? How many times have they been late? In my state, Virginia, Landlords are allowed to use the deposit for past due charges, at our discretion. We just have to give the tenant a notice within 30 days of what the deposit was applied to and tell them that it needs to be replenished. I don't usually do that because it's easier to get a judgment on anything other than a deposit if it gets to that point. However in situations where I am managing a property for another landlord who sells it, I always withhold any monies due from the deposit before turning the deposits over to the new owner or property manager. It amazes me the buyers almost never ask whether or not the tenants are current. Maybe they don't think they'll get the truth. I know I looked at a package of properties to purchase over the weekend and the landlord we met with insisted that he ran a tight ship and said all his tenants were current. I asked what was vacant right now and he told me the only property vacant was the one he met us at, which was newly rehabbed . Funny thing is I pulled the court records for his entity name before we met. I know for a fact that he had an eviction two days before we met and 10 days before we met. And neither were in the ZIP Code where we met, so means chances are pretty high that he has three or more vacancies. Just live and learn from your mistakes and is many others as you learn about. I very favorite mistakes are those that other people make! LOL

[Nolan M.]

Request that the sellers agent have the tenants sign an estoppel letter stating the amount of their security deposit. If they all say they didn't leave a deposit then that's that. You can then have them pay a security deposit once you close and have them sign new leases with you. Likely that they'll have to pay $50 or $100 a month extra until they've paid enough to cover the deposit. This is what I did on a triplex I recently bought.

[Renard Miller]

@Joe Splitrock  @Patrick Liska and @Nolan M. definitely helpful advice. I will make sure whatever the lay of the land going forward is, it is all in writing and the tenants are signed off

@Patti Robertson definitely lots of helpful lessons learned. Good that it's not a more expensive mistake. I will definitely think more carefully about what all needs to be in writing and understood ahead of time in the future.