What happens to deposits when I buy a property with tenants in it

[Jeff Lappe]

I am a new pro on BP and new to REI. I am looking at my first deal on a multi-family that has existing tenants. What is done with the deposits that the current owner has collected, so that if I buy the deposit refunds aren't coming out of my pocket if a tenant moves out? Thanks for any insight!

[Yengkong Sayaovong]

The previous owner should forward the deposit to you.

[Colleen F.]

All deposits should be credited on the HUD statement at closing. Get Estopels signed by the tenants stating what the basic terms of the lease are and what deposits they have made. This is where you can capture what should be credited or transferred to you at closing.

[Kenneth Garrett]

@Jeff Lappe

Be clear about the deposits.  I always add the language in my offer about leases and security deposits.  Check the leases and your state law.  In some areas they only collect a move in fee,  no deposit.  In my area I must honor the current lease no changes other then who rents go to and maintenance calls.

[Theresa Harris]

@Jeff Lappe  The current owner must give you the deposits and any prorated rent (ie you close on the 15th of the month, he owes you the portion of the rent from the 15th to the end of the month).  Make sure that this is written into the offer.  You will also want copies of the current leases and check that they are correct and signed by a lawyer (I think you call it epistled in the US).

[Account Closed]

It is part of the closing statement and is credited accordingly.  

It isn’t a check dorectly to you but rolled into closing as a credit basically from the seller. Along with prorated rents or any prepaid rents or last months rents.  

[Jeff Lappe]

Great info to know, thank you to everyone!

[Marc Winter]

@Colleen F. and @Theresa Harris are correct--it's all settled at closing with documentation, estopple letters and the HUD-1 accounting.

Here is the background for a sometimes seemingly blurry picture:  the seller says "these tenants paid $500 for a security deposit".  The tenants say "we paid $1,000 for security."  Who ya gonna call?  Rentbusters?

So, before closing, a full disclosure and verified accounting, with sign-oiffs (estopple letters) from all parties involved is required.  Then when you walk into the closing room and sign docs, you and/or your accountant will understand the 'books' of the deal.  

One less (major) potential problem resolved--transfer of rents and deposits.  Real estate 101.

Oh, one other remainder item:  if there is an unresolvable discrepancy holding up a closing between what the seller says and tenants state, have the title company hold an escrow for double the difference.  Once resolved after closing, the buyer may issue orders to the title company to  release the escrow minus any money owed to the buyer.

[Jeff Lappe]

Thanks @Marc Winter for the great info. Those specifics are very helpful, hopefully there will not be any unresolvable discrepancies!

[Jonathan W.]

@Jeff Lappe

You need to state in your offer that you want the deposits to transfer. If you dont have it in your offer the owner does not have to give you any of it. This should not be assumed that it will be on the closing docs, because that is not true.

[Jeff Lappe]

Thanks @Jonathan W. for the info, I will make sure to have it in the offer.

[Scott P.]

I've bought and sold with existing tenants.  Each time the seller gave the buyer a check for the deposits at closing.  Neither time was it listed on the settlement statement.  It was handled off to the side with a business or personal check.  

This should be talked through and agreed to as part of the sales negotiation.

[Jonathan W.]

@Jeff Lappe it should be transferred to you however your situation deems fit

[John Corey]

Some landlords get an estoppel agreement signed by each tenant when they buy. To make clear what the tenant understands. To flush out private or side agreements or other details. 

When you step into the existing landlord's shoes, how do you know the contracts

between then the and the existing tenants are correct and fully declared. The only way to know is to ask the other side and get them to sign-off.

[Hideyuki Gojima]

@Jeff Lappe

Welcome to BP!

I think everybody commented how you will receive deposits. 

One additional advice from me. Once you receive the deposit from your tenants, make sure you keep that money as restricted cash in your financial statement.

It is ok to be in your bank account with other cash as long as your state regulation allows but you should properly keep it separate on your book to properly record it in terms of accounting.  You should do this because the money is technically not yours unless you have significant issues with tenants. 

Good luck on your real estate investment!!