Security Deposits and Purchase Agreements

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Most if not all developers take the position: "I will not pay any hard money until I receive my full entitlements. I am conducting tests and adding value to your property. There is no room to add non-refundable money." Well, I can tell you from first hand experience--that is just not true. If a seller has a unique piece of property special to a developer, they will agree in purchase agreement to put up hard money in a strong market.

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Security Deposits in investment property purchase and sale transactions, notably multifamily property transactions, are often overlooked by Buyers and Sellers.

The security deposit amount transferred at closing is not insignificant and can result in a Purchaser finding him or herself purchasing a Property full of tenants, but lawfully stripped of security deposits.

I advise tenant to read up on the relevant Minnesota Statutes, most notably 504B.178.  In short, unless the contract specifies otherwise, a Seller need only “transfer the deposit” after “lawful deductions” made “to remedy tenant defaults in the payment of rent or other funds due to the landlord pursuant to an agreement.”

When and if a Seller does make lawful deductions there are additional statutory steps that are required.  I highly, highly recommend consulting a real estate transactional attorney whether buying or selling investment property, and don’t leave what might be your financial loss to drafting skills of real estate agent with a license that can be obtained in course of a few months–and the incentive (a commission) is to establish a sale–NOT to represent your legal interests.

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