I was told by another investor that if I am purchasing a multifamily property the seller at time of closing has to give back all the tenants deposits and if they do not have it, it will be taken out of the seller’s proceeds. Is this true?
The seller has to turn the deposits over to the buyer. He does not give them back.
So regardless of whether the seller has the deposits or not he will still have to provide them to me as the buyer at closing? By the way thanks for the prompt response.
Provided sellers rental / lease agreements clearly support the fact that deposits were collected? Sometimes landlords will allow potential tenants to rent without deposit because it was better than the empty unit!
You need to go through the rental / lease agreements and make sure of the amount of security deposit and verify it was collected, then you know exactly what seller should be turning over to buyer!
…and if it is documented that there were deposits given by the tenants upon occupancy, that should be a credit to you thereby lowering the amount you bring to the closing table. Same thing as the seller has to credit to you the amount of pro-rated property taxes for the portion of the year they owned it. You’ll be responsible for the whole tax amount when it comes due so they credit that to you at closing. If there are documented deposits, you should make sure that is credited to you on the HUD-1 at closing. Otherwise, make the closing atty fix it. The deposits are not to be converted to income for the previous owner because the tenants will want their deposit back upon move-out.
one question, you are buying it from the actual owner, not a bank or mortgage company, right? it’s a ‘normal’ sale, not a foreclosure,short sale
This would be true in the conventional sense, and this should be boiler plate escrow instructions on a commercial real estate purchase agreement.
Otherwise, escrow will reconcile the proceeds based on the information you provide. If the seller doesn’t have the deposits on hand, and you haven’t negotiated the transfer of those deposits to yourself, and it is not written in the contract, the escrow will not assign those deposits to you at closing and will not write you a check for the deposits.
I bought an apartment building from a seller who repo’d the building. He didn’t have deposits on hand from the renters. As a bargaining chip, I assumed liability for the deposits as the new buyer, and negotiated concessions from the seller in return. Don’t sweat this. Just negotiate a trade off if the seller doesn’t have the funds. Otherwise, this detail really should be covered in the purchase agreement like I said earlier.
You are using a uniform contract for commercial real estate aren’t you? If not, you should be.
It will ask you if you want the seller to assign the deposits to you, along with any utility deposits held by the utility company. Otherwise, you’ll end up funding all the deposits in one way or another.
Most states have laws covering the transfer of deposits…
Thank you all for your responses, they have been of great help. Thanks again.