In communities where rent control/no cause for eviction exist and where properties must be purchased subject to tenant's rights, how are tenant deposits handled in the negotiations/on the HUD?  Granted many sellers continue to receive rents without paying the mortgage, and one would think that the least they can do is transfer the deposit to the buyer, but in many cases, they have spent it already...  Will the bank pay the deposits or should buyers be told to budget this as a future expense?  Any insights?  (sorry for the repost, but I think I was in the wrong category earlier...)

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Very few banks will pay the deposits.  You can attempt to have it paid by including it on the HUD however it will usually be rejected.  If there is any kind of compensation to the seller, it may be used to replace/transfer the deposit.  The other thing that we have done is address the issue in the offer itself and make the buyer aware that they will not be receiving the deposit and they will be responsible for the deposit amount. 

Sara, I have been told that if your tenants are in California they should not have a problem getting back their security deposits that was given to the former owners (regardless of the bank/lender that foreclosed on their place of residence).  All local stipulations may also apply in areas such as Berkeley, San Francisco, and Oakland etc. :-)

We just did one in California and the seller no longer had the deposit to transfer to the buyer.  The bank would not pay it and we had to handle it in the offer, with the buyer indicating that they are aware there is not deposit being transfered.  Even though it is actually addressed in the California Offer to Purchase, the bank (BOA) would not pay the deposit.


thanks Annette, but I'm not sure why tenants would have no problem getting their deposit back when some sellers spend it when they know things are going south...:(

I believe she meant that they wouldn't have an issue (road block) from getting their deposits back from any new/subsequent owners.

In Illinois, if someone co-mingles, spends, or otherwise touches deposit money, they are in major legal hot water.  I would be livid if I found out that someone spent money that was not theirs (and I think that is the confusion of a lot of landlords...they think that the deposit money is theirs, and it's not).

Angela, you hit the nail on its head.  Exactly so!  Short Sale or Foreclosure does not change that fact.  The monies belong to the tenants when their tenancy ends minus normal amounts such as damages and cleaning, etc.:-)  The one that’s left holding the bag has to pay up.

Sara, I deal with these sorts of issues weekly.  I do a lot of work with the tenants and the banks as their new owners (after the foreclosure – so now these properties are REO’s). The banks/servicers/lenders have to give the tenants their security deposit back minus any normal amounts per the DRE’s rules if the tenants decide to move out of the property (they may choose to give them relocation assistance instead).  Bear in mind that this is done regardless of whether or not they (the banks) received any deposits from the former owner/buyer/borrower that they foreclosed on.  Assuming that the tenant was never a primary party to the transaction between the banks and this former property owner it is not their problem that the home is/was foreclosed on.  They rented the property and deposited their security monies in good faith.  It should have been deposited in a trust account for future disbursement when their tenancy ends.  During the Short Sale process the parties can try to whine and haggle, but the one that’s left holding the bag has to pay up.  Technically the banks are not responsible for security deposits at this point in time because they have not reclaimed the property from the delinquent borrower.  They can rightfully say no!:-)

I a short sale the banks are not technically responsible. And I agree with Angela, I think a lot of landlord have the misconception that the money is theirs. They seem shocked when the relocation assistance or short sale incentive funds are getting tapped to replace the security deposits they spent

Hi Dawn, often times the rents being paid out by the tenants during the Short Sale and Foreclosure process usually disappear with the current owner.  However, “the final guard locking up the cell” needs to make other monies such as the tenant’s security deposits reappear and pay them up when they are requested by the tenants regardless of  whether or not it was given to him or her. It is something that a buyer of a tenant occupied Short Sale or REO should be aware of.:-)





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