Inheriting Tenants | What happens with the security deposit

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Inheriting Tenants | What happens with the security deposit

Kiersten VogtPro Member
Real Estate Agent · Ocean View, NJ · Member since 2015 · 76 posts · 25 votes

Hello all!

I've already learned a valuable lesson in investing in small mutlfiamilies - including what happens to the security deposits in the initial offer.

We close on a duplex next week and I was under the impression we would receive a credit for the security deposits at closing. 

However, the agent for the seller is trying to tell me that the seller is going to keep the security deposit as rent if the tenant doesn't pay February's rent. Is that allowed?! She's saying I then have to collect another security deposit from the tenant.

The tenant is on a month to month lease and the agent is saying the seller is allowed to keep it since it's a month to month lease... but wouldn't be allowed to keep it if it was a yearly lease. But it's still a lease and the tenant wasn't given notice to move out - just notice of the sale of the property. 

What do I do? 

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David Steinbok
Rental Property Investor · Toronto · Member since 2018 · 126 posts · 106 votes
7y

it is supposed to go to new owner. It's technically the tenents money and is only being held in trust by the landlord. So if there is a new landlord then the security deposits just get moved to new owner to hold on to. You cant expect a tenent to come up with 2 months rent just because someone bought their apt. They have a hard enough time as it is just paying rent. 

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  • David Steinbok
    Rental Property Investor · Toronto · Member since 2018 · 126 posts · 106 votes
    7y

    it is supposed to go to new owner. It's technically the tenents money and is only being held in trust by the landlord. So if there is a new landlord then the security deposits just get moved to new owner to hold on to. You cant expect a tenent to come up with 2 months rent just because someone bought their apt. They have a hard enough time as it is just paying rent. 

    9Reply
  • Seth Williams
    Real Estate Broker · Winthrop, MA · Member since 2014 · 260 posts · 199 votes
    7y

    Ask your local real estate attorney, I’m not sure if it’s different by state. In mass, they are always transferred to the new owner, and rent, also is transferred on a pro rated Basis. if the tenant doesn’t pay rent, the owner should start serving them notice to make sure the tenants either come up to date, or are further in the eviction process. Get a copy of this served notice. 

    The landlord is allowed to use the security for unpaid rent at the termination of tenancy, and a sale of property is not a termination, and more than likely is opening them selves up to litigation. Demand a credit via your attorney, and make sure it’s included the final hud , seller statement. But, that’s just my Massachusetts opinion. 

    8Reply
  • Cason Acor
    Real Estate Agent · Salt Lake City, UT · Member since 2018 · 247 posts · 247 votes
    7y

    What happens to the security deposit should be outlined in the purchase contract that you made your offer with  and both parties agreed to. If they want to make a change a long the lines of what they’re doing, it should be put into an addendum and again, agreed upon in writing by both parties. I’m not an attorney, and Pennsylvania law might be different than where I’m at in Utah, but under Utah law, I’m pretty sure the seller keeping the security deposit on those grounds would constitute a breach of contract. I would go back and read through your purchase contract again and see what it says regarding security deposits. 

    4Reply
  • Kim Meredith HamptonBusiness Member
    Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
    7y

    Hi Kieraten,

    The security deposit should be credited to you for each tenant on your closing statement. The security deposit does not belong to the owner, it is kept for the benefit of each tenant until the time they vacate the property. Any rent that is paid for February, depending on when you close, gets prorated between both parties on the buying and selling side

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  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    7y

    Keep in mind that you will be responsible for refunding the deposit at the end of the lease whether the deposit is credited to you at closing or not

    I always put “All keys and deposits to be conveyed at closing and rents to be prorated from the date of closing “ in my contract 

    Must certainly you need to demand the deposit 

    6Reply
  • Roy Muller
    Member since 2018 · 27 posts · 19 votes
    7y

    @Kiersten Vogt I’m not a pro but I recently inherited 3 tenants in 2 different properties and in each case, the security deposits were transferred to me or my property mgmt. from 2 different sellers with different title companies. this was in Idaho and seemed to be the norm.

    1Reply
  • Craig Herring
    Pinckney, MI · Member since 2017 · 63 posts · 16 votes
    7y

    I agree with most others, that seems strange and I've never heard of that before, probably best to consult a local RE attorney.

    I just inherited 2 tenants and both security deposits were transferred to me as a credit at closing.

    0Reply
  • Account Closed
    Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes
    7y
    Originally posted by @Kiersten Vogt:

    Hello all!

    I've already learned a valuable lesson in investing in small mutlfiamilies - including what happens to the security deposits in the initial offer.

    We close on a duplex next week and I was under the impression we would receive a credit for the security deposits at closing. 

    However, the agent for the seller is trying to tell me that the seller is going to keep the security deposit as rent if the tenant doesn't pay February's rent. Is that allowed?! She's saying I then have to collect another security deposit from the tenant.

    The tenant is on a month to month lease and the agent is saying the seller is allowed to keep it since it's a month to month lease... but wouldn't be allowed to keep it if it was a yearly lease. But it's still a lease and the tenant wasn't given notice to move out - just notice of the sale of the property. 

    What do I do? 

     That is a complete fabrication of the truth. I would request a credit I would actually request a discount in an additional credit for having us a tenant that’s not paying rent. I would request that they either you take the tenant before closing or get a credit of extra dollars to cover the evection and lost rent. You were sold a unit that had a month-to-month tenant and all of a sudden now there is not a paying tenant. 

     At least you found out before closing. I will not except it and legally they are legally required to transfer the rent security deposit to you at closing.

    Because the paperwork more than likely that you have says it ask people have security deposit and that would be a breach of contract and you can back out of the closing or renegotiate which because the paperwork more than likely that you have says it ask people have security deposit and that would be a breach of contract and you can back out of the closing or renegotiate which  I had happened to me and I wish that I had learned it before closing. 

    0Reply
  • Account Closed
    Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes
    7y
    Originally posted by @Greg H.:

    Keep in mind that you will be responsible for refunding the deposit at the end of the lease whether the deposit is credited to you at closing or not

    I always put “All keys and deposits to be conveyed at closing and rents to be prorated from the date of closing “ in my contract 

    Must certainly you need to demand the deposit 

    Yes I agree with this as well your prorated rent should be paid regardless of if it was collected by the previous owner. It is not your responsibility to collect the rent from the tenant if it’s not a full month during closing. Just like they would have to pay you if you close on 1 March and somebody paid on 28 February their rent they would be legally required to transfer that money to you.  Yes I agree with this as well your prorated rent should be paid regardless of if it was collected by the previous owner. It is not your responsibility to collect the rent from the tenant if it’s not a full month during closing. Just like they would have to pay you if you close on 1 March and somebody paid on 28 February their rent they would be legally required to transfer that money to you 

    0Reply
  • Account Closed
    Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes
    7y

    Just  noticed you’re in my neck of the woods.  if you don’t mind would you share the area of town that you found a duplex that worked with the numbers and some details of the property?  

    0Reply
  • Kim Meredith HamptonBusiness Member
    Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
    7y
    Originally posted by @Account Closed:

    Just  noticed you’re in my neck of the woods.  if you don’t mind would you share the area of town that you found a duplex that worked with the numbers and some details of the property?  

    Hi Eric 

    Sorry, not sure which property you are referring to??

    Please feel free to PM me 

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    0Reply
  • Account Closed
    Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes
    7y
    Originally posted by @Kim Meredith Hampton:
    Originally posted by @Account Closed:

    Just  noticed you’re in my neck of the woods.  if you don’t mind would you share the area of town that you found a duplex that worked with the numbers and some details of the property?  

    Hi Eric 

    Sorry, not sure which property you are referring to??

    Please feel free to PM me 

    Sorry my mistake I for some reason thought you were the OP. 

    0Reply
  • Joel Fine
    Rental Property Investor · Leander, TX · Member since 2018 · 183 posts · 264 votes
    7y

    In Ohio where I'm buying, the standard purchase contract includes a clause staying that security deposits are credited to the buyer at closing. So it's never even been a question. You might check your purchase contract to see if it addresses this issue.

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    7y

    Agree with all.  Not only are security deposits paid to buyer at close, but so is prorated rents. I have it written into my purchase agreement of course. And that includes if I close on the 5th, for example, and the tenants have not paid their rent yet. I don't care. I'm getting prorated rents from buyer at close. The line of "collect another security deposit" is not only insulting, but it's not legally possible to do. 

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    You are also supposed to pay interest in the deposit, so make sure that the previous owner includes that when they give you the money. 

    1Reply
  • David Moon
    Rental Property Investor · Pittsburgh, PA · Member since 2018 · 12 posts · 9 votes
    7y

    @Kiersten Vogt

    If there is no security deposit prior to closing because the owner applied it to rent due to non-payment, of course must be written in lease as recourse due to breach for non payment; then there is no security deposit to transfer.

    PA lawyers please interject. This just happened to me too on 2 properties that I closed in January.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    @David Moon  As far as I know you can't apply security deposit to rent, unless they don't pay their last month-perhaps, but then they are no longer tenants.  My guess is the previous landlord/owner pocketed the money.

    If the seller doesn't have the cash for the deposit, I'd write to have cash back at closing to cover the deposits.

    1Reply
  • David Moon
    Rental Property Investor · Pittsburgh, PA · Member since 2018 · 12 posts · 9 votes
    7y

    PA Landlords may retain possession of security deposit for tenant’s breach of lease. In the previous owner’s lease, non payment is specifically defined as a breach of lease.

    0Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    7y
    Originally posted by @David Moon:

    PA Landlords may retain possession of security deposit for tenant’s breach of lease. In the previous owner’s lease, non payment is specifically defined as a breach of lease.

     My guess is to do that, Notice(opportunity to cure) has to be given which almost certainly has not been done

    1Reply
  • Aman A.
    Rental Property Investor · Redmond, WA · Member since 2017 · 47 posts · 37 votes
    7y

    @Kiersten Vogt I closed on duplexes last year and the deposits were transferred to me at closing. The prorated rents for that month were also transferred at closing.

    0Reply
  • David Moon
    Rental Property Investor · Pittsburgh, PA · Member since 2018 · 12 posts · 9 votes
    7y

    @Greg H. if I am understanding your point, Notice had been given.  I am dealing with a bad tenant situation, non payment for months and a previous owner who had become ill and let his business (and this tenant) slide. I’m actually going to court this week to remove this tenant so I should have more information and a judgement soon. 

    At close for this SFH, there was no pro-rated rent or security deposit transfer because there was none to transfer. I received pro rated rent and sec. deposits for the other units I purchased that were occupied with paying tenants

    I purchased 5 doors in this deal (triplex and 2 SFH) and on a positive note- the triplex that I purchased in this deal has 2 paying tenants and one vacant unit. These 2 units alone pay the PITI for the entire deal.

    0Reply
  • Kiersten VogtPro Member
    OP
    Real Estate Agent · Ocean View, NJ · Member since 2015 · 76 posts · 25 votes
    7y

    @David Steinbok That's what I thought, it's going to be hard to collect a new security AND rent. 

    @Seth Williams That was one of my arguments, the sale of the property isn't ending the tenancy so the security deposit can't be used for the unpaid rent. She's saying since it's a 30 day lease it can be. But notice wasn't given! So I agree with you. Thank you.

    @Cason Acor We signed a tenant occupied addendum which doesn't really help in this situation. I definitely learned my lesson and will include something about security deposits in the contract next time.

    @Kim Meredith Hampton That's exactly what I thought would happen, hence why I didn't think to include it in our offer. Thanks!

    @Greg H. Oh that's a perfect line to add into my future contracts! Thank you!!!

    @Roy Muller That's what I assumed would be the norm!

    @Account Closed Yes, in PA we are required to put it into an interest bearing account and I believe after year 3 you must give the tenant interest minus 1%. The tenant has been in there since 2013.

    1Reply
  • Kiersten VogtPro Member
    OP
    Real Estate Agent · Ocean View, NJ · Member since 2015 · 76 posts · 25 votes
    7y

    I just found this clause in the current lease between the seller and the current tenant "on signing this agreement, tenant will pay landlord the sum of $850 as a security deposit. Tenant may not, without landlord's prior written consent, apply this security deposit to the last month's rent or any other sum due under the agreement..." 

    The tenant occupied addendum that we signed says this "1. Within 5 days of the execution of the agreement, seller will furnish to buyer copies of all written lease agreements currently in effect and memoranda of the terms of all oral leases for the property. Where the full amount of security deposits paid by tenants will not be transferred at settlement, seller will furnish to buyer in writing the tenant's names, the amount of the security deposits, the amounts deducted, the dates and reasons for deduction and the tenant's written notification or acknowledgement of the deduction."

    And it ALSO says "3. Seller will assign all leases and security deposits together with interest, if any, to buyer at settlement." 

    Lastly, I just noticed that the one lease isn't even signed the by the seller!! What do I do about THAT!?!

    1Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    7y

    @Kiersten Vogt This is just a situation where the sellers agent is putting their nose somewhere it shouldn't be. This is an issue that is hammered out between the lawyers.

    In CT any security deposits are transferred to the new owner, there is a line item on the closing statement for this. Most of the time attorneys are completely aware of this and make the necessary adjustments on the closing statements. However, from time to time lawyers may not realize the home is a rental until you are sitting at the closing table. 

    This is why it is important to examine the closing statement in advance of closing so you try and avoid resolving these issues sitting at the closing table. I have been there as a buyer and it can cause delays in closing. 

    0Reply
  • Sophia Coleman
    Real Estate Broker · Chicago, IL · Member since 2019 · 23 posts · 10 votes
    7y

    @Kiersten Vogt I thought everything transfers, am I missing something here?

    0Reply
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