Can Security Deposits Be Cashed Out For Down Pmnt?
Hello all. All of the props I'm considering purchasing are presently occupied. What is the "custom" when it comes to security deposits held by the seller: to apply a credit toward the purchase price of the property, or the cut a check to the buyer for them? I'm trying to figure out ways to ease the burden of the down payment.
Also, same question as it applies to pro-rated rents.
THANKS!
Usually it is written in the sales agreement that the amounts will be credited at closing thus going towards your down payment.
I see...so we were pre-qualified for $30K based on a $3,500 down payment...
The security deposits would total $850...
...so I only need to show up with $2,650 at the closing????
tony1853,
Be very careful here. The security deposits do not belong to the seller. Security deposits belong to the tenants, and are just being held in escrow for the tenants by the landlord.
When the deposits are transferred to you, whether by a credit at closing or by a check from the seller, the security deposits will still belong to the tenants.
Check your landlord-tenant laws on security deposits. Many jurisdictions have laws governing how security deposits must be escrowed, accounted for, and how much interest they accrue. There are often requirements that the deposits be held in an escrow account and not comingled with your operating funds. If your local landlord tenant laws have similar requirements, then using the deposits as a portion of your downpayment would be prohibited.
Instead of asking for a credit at settlement, ask for a check for the amount of the deposits (plus accrued interest if mandated by your local laws). Deposit the check directly into your own security deposit escrow account. I hope you have an estopple letter from the tenant(s) certifying the current rent amount, the lease term, and the amount of the security deposit paid.
One credit you want to be sure that you get is a credit for "scheduled" rents. Even if the rent is not collected (late pay, for example), you are entitled to a credit for that rent. For example, suppose you are closing on the 5th of the month on an eight unit building. All units are occupied with each tenant paying $540 per month rent. If the settlement month is a 30-day month, then you are entitled to a credit at settlement for 25 days of the scheduled rents, or $450 per unit -- even if the rent has not been collected -- for a total rent credit of $3600 in this example.
When you are buying an income property subject to an existing lease, it is usually better for you to settle at the beginning of the month rather than at the end of the month.
When purchasing multiple dwelling units in the State of Calif. I take a statement from each tenant. I try to close on the beginning of the month. I have a check dispursed from the Seller to me the friendly Buyer for all rental deposits etc. I check the statements from the tenants against the statement of rents and deposits from the Seller. So many times biggy errors. I also very carefully look over the management arrangements and with great care. What is the status of the residential manager on premises. Monies owed, rent as consideration of management. Full Job Description of Resident Managers duties and the contract of employment. I also look carefully for the unpaid bills for labor done by outside contractors the lien as yet unrecorded. In many instances I am terminating the full management and the residential manager. The three vacancies that are reported as unoccupied but are always full when I check. The parking spaces that are rented to non tenants and to special tenants that have many cars. Calif. you know. Whenever possible I am there about a week before closing and I am there almost the full 24 hours. You would be suprised what pops up late at night. The artist that displayed all of his paintings on the walls of the lobby, came in to remove them two days before closing. Seems he had been paid and they were on property list. I hated them very very non objective, looked like a frog spitting, turned out to be a picture of the local hustler on her day off. The artsy gay gentlemen who had all new cherry wood floors installed in his single. The Swedish modern fireplace vented through the window non permitted. The Penthouse which turned out to be a brothel on a reservation only schedule. Specialized in transvets. Yes thats the one that described me as the new owner with a strict Amish upbringing. Seems I asked him to wear underwear instead of his usual attire of a skinny string.
The Lesbian Arm Wrestle Contest at the pool about three in the morning. The winner parked her 18 wheeler in the outside parking lot and nobody went in or out.
A week after close, I offered to torch the place with every body in it. They formed a chorus of tenants and sank I love you truly. Gave me a present of an Amish Buggy Whip so I would feel at home. I have a feeling that the lady in the black vinyl jacket had other plans.
Yes Hollywood, Hollywood what wonderful memories. Yeah Sure.
So examine with care before you close.
Exhausted Lucius