Not Knowing This Can Cost You Thousands
Forgetting to Double Check These Two Line Items Is An Investor’s Worst Nightmare
Most investors - even those that are just getting started - know what to look for in their Closing Statement when purchasing a property. Ensuring the loan amount, EMD (Earnest Money Deposit) and any seller concessions are correctly listed is usually the first order of business. But there are two line items that even experienced buyers sometimes forget to double check, and this oversight can cost you thousands.
The two line items are: Rents and Security Deposits.
When you’re purchasing a property with tenants in place, any rents that have been paid for the month in which you take ownership, go to you at closing on a prorated basis.
For Example: You’re purchasing an apartment building that’s fully occupied. You’re scheduled to close on the 15th of April. All April rents were paid between the 1st and the 5th of the month. The total collected by the seller’s property management team was $14,000.
Being that you will be taking ownership on the 15th of April, $7,467 of the total $14,000 that was collected is owed to you at closing. (Here’s the Math: $14,000 / 30 Days = $466.67 and $466.67 x 16 Days = $7,467)
Additionally, all of the security deposits that have been paid by tenants upon move-in or throughout their tenancy, should also go to you at closing.
For Example: Across all of the tenant’s leases, a total of $16,500 in security deposits has been collected by the current owner. At closing, 100% of these funds should be credited to you.
Even though these funds were paid prior to you becoming the owner of the property, they pass on to you because you are inheriting the tenant’s leases.
Escrow companies miscalculate and improperly list these two line items all the time. As a result, you can leave behind thousands at the closing table. Always remember to double check these figures, and reference back to the lease agreements and seller disclosures to ensure you’re credited every dollar that’s owed to you.
If you’re considering purchasing a home or adding an investment property to your portfolio, we’re here to help.