If you’ve been researching real estate investing or own a rental property, you’ve likely heard horror stories about evicting tenants. 9 months to evict! Legal bills that could buy you a pre-owned Mercedes! While they stories may be true, you can avoid most of the drama and potentially save a ton of money by offering cash for keys instead. This article will walk you through the decision making process and steps you need to follow to offer your tenants cash for keys and a vacant rental property.
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What is Cash for Keys?
Cash for keys is a nickname for a legally binding private agreement between a property owner and a tenant or occupant of property they own. In a cash for keys agreement, a property owner offers a cash payment to a tenant to vacate their property in a certain number of days, in order to avoid a lengthy and expensive formal eviction process.
Generally speaking, there are four scenarios where a property owner will offer a tenant or occupant a cash for keys agreement:
- Vacating former homeowners who are still living in an REO (Real Estate Owned) property after the foreclosure process.
In many cases, when a former homeowner remains in an REO property, the lender will offer them cash for keys to make the property easier to show and sell.
- Vacating tenants from an REO property.
In other cases, tenants may still be living in REO properties with active leases or month-to-month tenancy agreements when the property goes into the foreclosure process. Like with former homeowners, lenders will often try and offer these tenants a cash for keys agreement to make the property easier to show and sell.
- Vacating tenants from a rental property you own
Whether you just purchased an occupied property or want to have a tenant you signed a lease with move out, a cash for keys agreement can often be an easier alternative to the formal eviction process.
- Vacating squatters from an REO property or a rental property you own
When foreclosed homes are vacant for long periods of time, opportunistic squatters sometimes move into the property and demand to be evicted. Though laws vary widely, evicting squatters often means going through the formal eviction process, which can be an expensive and lengthy process. Though they have fewer rights than tenants, a cash for keys agreement can often save money in tenant friendly states.
Is Cash for Keys Legal?
Yes. Cash for keys agreements are legal in all 50 states. While many people see cash for keys offers as somehow depriving a tenant of due process, in reality you are simply settling a dispute outside of the court system. Believe it or not, most housing courts actually encourage landlords and tenants to resolve issues on their own without using the court’s time.
Exception: Rent Stabilized or Rent Controlled Units
While cash for keys agreements are indeed legal, there are some caveats for using this strategy with rent stabilized or rent controlled tenants. Even then the offers are still perfectly legal, but the practice is regulated.
In Los Angeles for example, landlords must formally apprise rent controlled tenants of their rights under the law and must give them a 30 day grace period to back out of the cash for keys offer. To see if your state participates in a rent control or rent stabilization program, check out Landlord.com’s state-by-state guide here. IET Real Estate, a Los Angeles City based Real Estate Brokerage, has a great guide on the somewhat byzantine tenant buyout process in Los Angeles here.
5 Steps to a Successful Cash for Keys Deal
Okay, now that you understand a bit more about how cash for keys agreements work and why they can have a good ROI, let’s walk through the 5 steps you need to follow for a successful deal.
1. Send Them an Eviction Notice
Even though you’ve already figured out that a cash for keys offer will have a better ROI, the first step in a successful cash for keys deal is to send an eviction notice. Here’s why: It lets the tenant know that you’re serious. Making a verbal threat of eviction often does not have the same impact as a written eviction notice.
The only caveat here is that you need to have cause to evict your tenant to send an eviction notice if they have an active lease. Some acceptable causes for eviction include non payment of rent, damaging the apartment beyond normal wear and tear, or engaging in illegal activity on the property, or otherwise violating the lease.
2. Make a Verbal Offer
After you’ve sent an eviction notice, the next step is to approach your problem tenant and offer them a way out of the eviction. Here’s how to do it:
Be Empathetic, but Explain You Are Running a Business
Since most problem tenants are in dire financial straits, a little bit of empathy can go a long way. If you’ve been in a similar situation or know someone who has, tell them. Then calmly explain that you are in an equally risky situation. Missed rent payments might mean going into foreclosure on leveraged properties or worse. Your rapport might be a bit bruised after an eviction notice, but that doesn’t mean you can’t make a connection now.
Explain the Risks of Eviction
You (or your lawyer or Realtor) need to calmly explain that you fully intend to follow through with the eviction process. More importantly, you need to explain that the process can be long, expensive, and stressful, for them. Tell them that even if they can delay the eviction, they are only delaying the inevitable. If they’re behind in rent or have damaged the unit, remind them that you can sue for back rent and damages in small claims court after the eviction. If they lose there, you can legally garnish their wages and damage their credit. Worse, in some states an eviction will show up on a tenant screening report which will make renting a new home very, difficult.
Offer Cash for Keys as a Win/Win Solution
Next, explain that they can avoid the long, ugly eviction process, save their credit score, and walk away with enough money to move their stuff and maybe enough cash to put down a security deposit on a new place.
Be Wary of Using Threatening Language
Since all states have laws that protect tenants from threats or harassment from landlords, you need to be careful about wording your offer and especially describing the risks of eviction. Stick to stating objective facts about the process and avoid statements that might be interpreted as threats like, “I can make your life hell!” or “This is the best deal you can get so you better take it or else” etc.
Make a Specific Offer
Make sure that the offer you make spells out exactly what you want for your payment. That means the exact day (and time!) they have to leave, the condition you want the unit left in (“broom clean” is the standard) including removal of furniture, pets, etc. You may also want to confirm that utilities are current.
Negotiation Strategies: How Much Should You Offer?
While you obviously want to pay less money rather than more, there are a few guidelines you should follow in order to make a successful cash for keys offer.
Once you have a good idea of what an eviction might cost you, come up with a cash for keys offer that will cost you less while still giving your tenant a reasonable incentive to move out.
While there is no exact formula to figure out what will incentivize a tenant to leave and cost you less than an eviction, here are a few guidelines to think about.
- What is your tenant’s financial situation?
If your tenant is unemployed and ineligible for unemployment insurance or other assistance, then finding a new apartment will be very difficult. That means they may be more desperate and more willing to take a cash offer rather than fight an eviction.
- What is The Maximum You Can Pay and Still get a Decent ROI?
If you’ve figured out that an eviction might cost $5,000 at a minimum, then what is the most amount of money you’re willing to offer to avoid that cost? Remember to factor in stress and your time when coming up with a number. Cut this number in half and you have a decent starting point for your offer.
Make a Tiered Offer
The best way to ensure a good return for your offer is to give them several options to choose from. For example, let’s say the maximum you want to offer is $1500. Offer them $1500 if they move out in a week, $750 if they move out in 2 weeks, and $500 if they move out in a month.
Make Sure Your Offer is Not a Round Number
If you’re thinking of offering $2000, offer a more “precise” amount like $1975” instead. This is an old negotiating trick, but has actually been proven to be effective in a Harvard Business School study.
3. Write or Use a good Cash for Keys Agreement Template
Once your tenant agrees to a cash for keys deal, the next step is to create or download a written agreement that spells out the details you agreed to. Make sure it’s as detailed as possible and bring two copies, one for them and one for your records.
Example of a good cash for keys agreement
Here are two cash for keys templates you can download and modify for your needs. Please note that the second agreement is copyrighted. That means you cannot use it unless you are a member of CAR or have their express permission. You can however, use ideas from their agreement to draft your own.
- Cash for Keys Agreement from foreclosureforum.com
- Cash for Keys Agreement From the California Association of Realtors
Expert Tip: Consider Hiring an Attorney to Help Draft Your Cash for Keys Agreement
If your property is in a tenant friendly state hiring an attorney to help you through the process can have a great ROI. Here’s a few tips from New Jersey Attorney Jeff Henninger for a successful cash for keys deal.
“Every jurisdiction has different laws and only an attorney can help the landlord determine what is the best course of action. For example, should you file for eviction and then use cash for keys as a settlement? Or should you offer this before eviction? A lot will depend on the law, the cost, the process, etc. The attorney will also help you draft the appropriate agreement. While this is called cash for keys, you should be paying by check and the check needs to be provided after the tenant moves out and only after they sign the agreement.
You also don’t want to just wing it to save money. If you handle this the wrong way, the tenant can claim an illegal eviction. If the attorney is just drafting an agreement and giving you advice, it shouldn’t cost much at all.”
4. Arrange a Day/Time to Inspect the Property and Sign the Agreement
Once your offer and the details of the move are accepted, schedule a time to meet at the unit to inspect to make sure it’s in the agreed condition, sign the agreement, pay them, and most importantly, change the locks.
5. Inspection and Move out Day
During the day of the inspection, make sure to show up on time, and thoroughly inspect the unit to make sure it’s left in the agreed upon condition. Once you sign the agreement, pay the tenant, and then immediately change the locks to the unit.
Expert Tip: Make Sure You Thoroughly Inspect the Property Before Paying
Before handing over your payment, make sure you inspect the property thoroughly. Tenants sometimes leave personal property (or garbage) in the garage, basement, attic, or cabinets. Here’s Orlando Broker Associate David Welch’s thoughts on inspecting the property:
“When I would arrive for the cash for keys, I would literally go from room to room and check every closet, every cabinet, medicine cabinet, the shed and garage. I also inspected the inside of the dishwasher, refrigerator, range and microwave. On condos, you have to make sure to find out if there is any type of storage unit associated with the unit. I missed this one time, and found old oil and gasoline containers, and had to take them out to the county landfill myself to dispose of them properly.”.
Why Offering Cash for Keys Can Get Property Owners a Good ROI
While cash for keys agreements are sometimes viewed negatively, in reality they offer benefits for both property owners and tenants. While the eviction process can be very expensive and stressful for property owners, it can also end up costing tenants time, effort, and money. Worse, if the property owner decides to sue for back rent in small claims court, it can damage their credit and affect their ability to rent property in the future.
You Can Greatly Reduce Lost Rent + Lawyer Fees + Filing Fees
Tenants who are living in a property that has been foreclosed on or in a rental they have stopped paying rent for are looking primarily for one thing. Time. Every day they can delay the inevitable, that’s one more day they can avoid looking for a new (probably lower quality) place, or worse, ending up on a relative’s couch. They may be searching desperately for a new job, awaiting benefits, or a million other financial hardships.
The problem is that as a landlord you may be very sympathetic to their plight, but for you time = money. Every day you aren’t receiving rent for your investment affects your bottom line. If your rental is not cash flowing it may as well not exist. So instead of offering time, you need to offer your tenant the next best thing. Cash.
You Can Avoid Cleaning and Repair Fees Entirely
In addition to making tenants to agree to vacate the property by a given date, cash for keys agreements also generally insist that tenants leave the property in “broom swept” condition. This can be important as tenants facing eviction rarely leave the property in good condition.
Worse, many tenants not only leave behind trash and belongings that need to be removed, but often vandalize the property or even steal fixtures like appliances and copper pipes. Leaving the water running, or purposefully overflowing toilets or sinks are not as uncommon as you might think. That means convincing a tenant to leave the property in good condition in exchange for payment can have a good ROI.
Running the Numbers: The Cost of an Eviction vs Cash for Keys
In order to determine whether a cash for keys agreement will make sense financially, you need to figure out how much it will likely cost you to evict your tenant.
While it’s pretty much impossible to get an exact figure, you can get a good sense of how much an eviction will hurt your bottom line by the state you live in. Landlord friendly states include Texas, Indiana, Colorado, Arizona, Florida, Kentucky, Georgia and Mississippi. In a landlord friendly state like Texas for example, an eviction still might end up costing you around $5000 in lost rent, legal costs, and cleaning fees.
In a tenant friendly state like New York or California on the other hand, you may be looking at lost rent, legal costs and cleaning bills ten times that or more.
Here’s a simple formula to figure out a rough estimate of how much an eviction will cost you:
The unit’s monthly rent x the average number of months an eviction may take + legal fees + filing fees + sheriff’s fees + cleanup/repair costs + the value of your time (and sanity).
Remember to factor in evictions that may happen in the middle of the month when trying to calculate lost rent. Depending on your location, an eviction on the 15th might mean not finding a new tenant until the 1st. That’s two weeks lost rent.
Also remember to factor in the time it will take to find a new tenant. If your rental is in a hot area, then finding a great tenant may be easy. In an area with a high vacancy rate, then finding a qualified new tenant may take you a few weeks, or even a few months.
To learn more about the formal eviction process, consult an attorney or check out our in-depth guide on how to evict tenants here.
Expert Tip: Leave Your Ego at the Door
Beyond the financial losses, many new landlord’s take the idea of paying off their tenants to leave personally. Don’t. You’re not the first landlord to be in this position and you won’t be the last. Missouri Realtor David Kruse agrees:
“It’s frustrating right, the idea of giving money to someone who is already way late on rent and who has likely damaged the property? But sometimes, that makes the most financial sense, and you have to vote with your wallet and not your ego. Giving someone who owes you money cash so that they move occasionally is the best move. Avoid them further damaging the property when they move out, avoid them just not moving out, avoid having to pay someone to throw their junk away, avoid having to worry what the local laws are for their junk etc.”
The Bottom Line: Cash for Keys
Cash for keys can be a great way to avoid a long, expensive and stressful formal eviction process through the courts. Make sure to understand how much to offer, and follow the five steps to a successful agreement. Then, sign up for Cozy so that in the future you can avoid messy eviction situations.