Who gets security deposits when buying occupied multi unit?

Question

Hi Everyone! I am in kern county, CA and in escrow on my first 4 unit property and currently 3/4 units are tenant occupied and am wondering if I should get those 3 security deposits from the seller upon closing? I spoke to the property manager & she told me that they do not take the deposits upon signing the leases with the tenants, so the current owner has them and would probably keep them upon closing. Everything I've read so far seems to imply that I should get them in closing since I will be responsible for giving some or all of that $ back to the tenants I am inheriting if & when they decide to leave. Is this something I Am legally  allowed to ask for at closing & that it will NOT count as a seller credit? In ca on a conventional loan for multi units you can only get a max of 2% seller credit at closing which I am already getting. Thanks!

Robert Melcher · Answer

The money in a security deposit belongs to the tenants.

It transfers CUSTODY with the sale of the property but the new landlord is bound for accounting for the funds when each resident vacates. In my opinion, the deposits should transfer with the sale, but it is not the new owner's money, it is his responsiblity.

Marina Shlomov · Answer

I am pretty sure that the seller should transfer security deposits to you while at closing. Security deposits don't belong to landlords or property managers. It's money that we (landlords or property managers) hold in escrow for the tenants when they move out for such things as damages. It is against the law to withhold security deposits from tenants and if your seller does not transfer the deposits to you, you will be the one responsible for the return of the deposits.

We have purchased occupied properties many times, but I always told the closing attorney and the my agent to make sure that security deposit is a part of the transaction. It is ILLEGAL to withhold security deposits from the tenants. It's their money, we are just holding it for them in case there's damage to the property at move out.

Hope that helps.

Deanna McCormick · Answer

This should have been addressed in your purchase agreement, You should have requested rent roll, copies of applications, leases, CRP's , move out's, security deposit agreements for all units for the past 2 years.

Ask for a Estoppel from each tenant that confirms, lease rate, and security deposit.

Security deposits are part of the closing and a line item and are part of the sale. either transferred by cashiers check or rolled into closing fee's.

As well as rent it is usually prorated per the date of closing. Seller takes any hit on unpaid rent not collected for the last month, you take over as all accounts are even correct balance from date of ownership.

same as utilites, and property taxes..

PX Head · Answer

I just bought a duplex about 4 months ago and now the tenants are starting to make plans to move out.  They are asking about their security deposit.  It was not accounted for at closing, as I just read over the closing statement.  Do I owe them their deposit or do they need to get them from previous owner?  Any help would be appreciated.  This is in Atlanta, GA

Patrick Doyle · Answer

Just checked my purchase agreement and my agent did put in the estoppel. Im glad this was on the forums I was stressing out lol. Glad I have a good agent. Thanks for the advice guys.

Amber Smith · Answer

Thanks for all that info! My realtor didn't ask for any of that or know about it I think...I have copies of the leases & know the rent amounts, but at least I know what to ask for next time :)

Max Gradowitz · Answer

An agent that is experienced with tenant-occupied multi-unit properties should ALWAYS ALWAYS  ALWAYS do the following things differently in these situations (at least in California):

1) Use the Residential Income Property Purchase Agreement Form, not the standard purchase agreement form for single family houses that is used in 99% of sales.  Agents that aren't experienced with multi-unit properties oftentimes use the standard purchase agreement, which doesn't protect you as much as a new landlord buying a multi-unit property with inherited tenants.  The standard form doesn't even mention tenant's rents, rights to deposits, etc.  Which brings me to the next point...

2) In addition to using the correct form, ALWAYS check the box on that agreement form that says "Tenant Estoppel Certificates".  This puts the seller on notice that, before the close of escrow, they are to fill out a separate contract for each tenant stating where the deposit goes, what the rent is going to be with the new landlord, etc (in other words, everything you are stressing about now).  By you or your agent checking that box, you are then entitled to clearly understand how much each tenant's deposit is, how much their rent is, and how the deposit and/or rent amount will change with the new ownership of the property.

I personally would never purchase a rental property without checking that box or knowing that I am getting tenant estoppel certificates before the close of escrow.  That way I know how much each tenant's deposit was, how much their rent was, etc so I can keep everything the same and simply collect the deposits from the management company (or the seller, or whoever has the deposits) by sending them the purchase agreement and estoppel certificates.  Now, you don't absolutely HAVE TO use the correct purchase agreement that offers more protections, nor do you absolutely have to check that box.  You can always just risk it and nicely ask for the estoppel certs or mid-escrow or simply ask for the deposits from the seller mid-escrow, but they aren't contractually obligated to do anything for you.  That's why it's prudent to know these things!  Good luck with your deal!

Amber Smith · Answer

Awesome, that's what I was thinking , I am definitely going to make sure the seller gives them to me as part of closing. Thanks!

Side note, can I private message you about your investments in Bakersfield? I'm always looking to chat with other investors about their experience & get any advice I can :)

Andrew Jones · Answer

I have property in Bakersfield. You most definitely should get the security deposits in closing as it will be your responsibility to give the tenants money back if they leave the place clean. On a side not in my experience tenants usually leave the place a mess and you keep a portion or all of the security deposit depending on damages.

Amber Smith · Answer

Thanks everyone, I just asked my agent & mortgage broker to ask the seller for them at closing!

Who gets security deposits when buying occupied multi unit?

Most Popular Reply