Many popular books on building personal wealth advocate residential real estate investments. The idea is that becoming a landlord by purchasing multiple properties and leasing them to renters creates a regular passive income over time. However, most landlords would laugh at that idea, as the job can often be the opposite of “passive.” Handling property maintenance, unexpected repairs, payment issues, and problem tenants are frequent sources of landlord headaches. However, the idea of “cash for keys” aims to simplify at least one aspect of the landlord role.
What Is a Cash for Keys Agreement?
Cash for keys is a written agreement for a landlord to pay a tenant a sum of money to move out. This agreement may help to avoid a drawn out and costly eviction, which can involve attorney fees, court fees, and even law enforcement. Lenders and borrowers may also enter a cash for keys agreement during property foreclosure.
The amount of money in a cash for keys arrangement is usually several thousand dollars to cover the cost of moving.
How a Cash for Keys Agreement Works
Cash for keys is an alternative to eviction. Instead of beginning what can be a lengthy and heated eviction process, property owners offer to pay tenants a sum of money as an incentive to move out by a certain date. In the long run, many proponents find cash for keys to be less costly and more time-efficient than a formal eviction, which can end up involving an attorney and even law enforcement. Really, it can be a win-win situation, as the tenant receives money the help with relocation assistance and the landlord gets the tenant moved out quickly.
The Cash for Keys Agreement Process
An eviction notice usually starts off the cash for keys process — the rental property owner stops receiving rent payments, so they ask the occupants to leave the property. If your tenant fails to pay rent, you might have a hard time paying your mortgage. This could lead to issues with your credit and affect your ability to qualify for commercial real estate loans or blanket loans in the future, so you may decide it’s time to move on to another tenant.
Landlords will not always be the first to offer a cash for keys agreement, but tenants can request one. If the landlord offers to create an agreement, both parties decide on a move out date and then sign it. The tenant usually agrees to maintain the condition of the property before leaving the premises and also do a quick clean before moving out.
State laws and local laws may differ depending on where you live, but this arrangement is legal in all 50 U.S. states.
Benefits of Using a Cash for Keys Deal
Whether you need a tenant to leave rapidly because of non-payment, a lease buyout opportunity, or because the homeowner has decided to sell the property deed in a short sale, cash for keys can provide a significant upside.
- Time: The eviction process can sometimes seem to last forever, as a stubborn tenant might simply refuse to leave. Since there’s little you can do to physically remove a person and their things from a rental property, this process can be frustrating and emotionally depleting. It can drain time – your most important resource – as you constantly pursue options to get a problem tenant out. There is no greater motivator than money. With a deadline to vacate incentivized by cash, it will be in the tenant’s interest to get out and move on according to your timeline.
- Rental Income: If you have to evict a tenant from a rental property due to non-payment, it’s in your best interest to get them out as soon as possible, as each month that passes means another mortgage payment and a lost opportunity for rental income. In some cases, you can actually save yourself money by paying the renter to leave by a certain date. Since someone delinquent on rent is probably short on funds, cash for keys can be a powerful incentive can help them cover moving expenses.
- Legal Fees: It’s no secret that attorney fees are costly. Though beginning the eviction process does not require a lawyer, a smart estate agent will involve one because any missteps may be costly in the future. And, if the tenant takes their time or simply refuses to vacate the property, an attorney will eventually need to be engaged. In the long run, it can likely save you significant legal expenses to simply offer the tenant a cash incentive to get out.
- Repair Costs: Difficult tenants who refuse to leave might not be the most conscientious when it comes to caring for the property and recovering a security deposit, especially if they’re angry about being asked to leave. Incensed renters have been known to trash a property on their way out, as a parting gesture to the landlord. Making the required repairs can be pricier than simply offering cash for keys. Avoid a destructive dynamic by keeping renters happy by offering them cash to leave. (If you are seriously concerned about damage to your property, consider rental property insurance.)
The Amount of Cash for Keys
Figuring out how much money to include in a cash for keys agreement can be a challenge, but there are a few options. First, you can figure out how much court fees would have cost you and offer that amount. You may not be saving much money, but you’ll deal with significantly less hassle. Otherwise, you could agree to pay one month’s rent, or half of a month plus their security deposit. The cost of living in your area will also help determine the amount, so the cost of cash for keys in California may be significantly higher than if you’re operating in the Midwest, for example.
If you’re receiving money in a cash for keys agreement, keep in mind that it is taxable. So you have to pay taxes on the money since it’s considered income. We recommend saving 30% to 40% of the cash you get for tax purposes.
If you need help with cash flow while handling a cash for keys agreement, take a look at our list of the best credit cards for real estate agents and investors.
Is Cash for Keys Legal?
Cash for keys deals are legal in all 50 United States. In fact, these transactions are often encouraged to reduce the number of rental dispute cases in the court system. However, it’s still important for real estate investors to ensure their lease contracts are in accordance with local regulations and that tenants are given appropriate notice and grounds for eviction.
If you own a rental property that has some form of rent control or rent stabilization, there may be some additional hoops to jump through, though offering cash for keys is still possible. For example, you may need to formally notify renters of their rights or allow a grace period when a renter may renege on a cash for keys deal.
Tips for a Smooth Cash for Keys Transaction
Though the goal of cash for keys is to evade the palaver of a traditional eviction process, there still might be some conflict involved. The following advice can help you minimize the drama and ensure a persuasive presentation.
- Send a Formal Notice: Sometimes, difficult tenants are not the easiest to track down, but the old eviction notice tacked to the door might not be the best way to introduce such consequential information. A formal notice sent via certified mail with a return receipt is one way to assure your tenant receives the information with proof of delivery. You can also employ a process server, though that might cost more and take longer to accomplish.
- Speak to the Tenant: Once the renter has a chance to consider the notice, follow up with a phone call or an in-person visit. Propose the cash for keys idea verbally to gauge their impression. If they seem receptive, create a written contract outlining the deal, which you both will sign.
- Accentuate the Positive: When communicating with your tenant, make sure to use neutral language. Keep your ego out of the picture and explain why this option is beneficial from a business perspective. Make sure to emphasize how this deal offers a win-win solution for both of you. Do not threaten, but be sure the renter understands the risks of moving forward with a formal eviction, which can include damages to their credit score and difficulty passing a future tenant screening. Be clear and firm in your offer. Do not leave anything open to interpretation or negotiation.
Cash for Keys Agreement Form
If you aren’t sure where to start when creating your cash for keys agreement, the National Association of Income Property Owners has a free form you can use. You can fill in the form directly and print it off for both you and your tenant to sign.
Successfully Completing a Cash for Keys Agreement
One of the most important elements of a successful cash for keys transaction is specificity. Make a very clear offer, outlining payments and dates in a fashion that is simply understood to avoid any confusion or misinterpretation. Make sure everything is properly recorded and consult an attorney if necessary.
- Find the Magic Number: When determining the right sum to offer your tenant, take time to calculate the return on investment. Decide on a move-out deadline that seems reasonable and settle on a dollar amount that you’d be willing to pay to make that happen without the headache of official eviction proceedings. Make sure the sum is at least enough to cover relocation costs for the tenant as well as a security deposit on a new place. In some cases, landlords make a leveled offer, which offers bigger incentives for a faster move-out.
- Write It Down: All aspects of your cash for keys agreement should be written and signed by both parties. Seek legal counsel to ensure everything you’ve presented and agreed upon is in line with local regulations and tenants rights initiatives.
- Make a Date: Once you’ve verified your tenant is amenable to a your cash for keys offer, set a date to meet and sign a final agreement. You’ll also need to outline a date for a final property inspection as well as a final moving day when you’ll receive those keys for cash (preferably before your next mortgage payment is due).
Final Word: Cash for Keys Deals
Property management is hard. It’s even harder when dealing with a problem tenant or time-sensitive eviction related to a property sale. Cash for keys can incentivize renters to move out quickly, thereby saving the property owner potential legal fees, months of lost rent, and repairs. Additionally, cash for keys offers value in terms of saving time, conserving resources, and reducing hassles for the landlord and property owner. Before consenting to pay a cash for keys deal, remember to consult your attorney and put all agreements into writing, signed by both the property owner and the tenant.
Sidebar: Cash for Keys in Foreclosure
Cash for keys is not only an agreement between landlord and tenant. Sometimes, cash for keys can be used when real estate is facing foreclosure by a mortgage company because the owner is no longer making mortgage payments to the lender. Like eviction, the foreclosure process can be long and dramatic. Before the real estate is foreclosed upon and the mortgage lender transfers the deed, the lender can offer the homeowner of the foreclosed property a cash incentive for vacating expediently and turning over the deed. Offering cash for keys can help the mortgage lender in a foreclosure sale avoid retaining a foreclosure defense attorney, involving the police in an unlawful detainer, and even going to court with the homeowner of the foreclosed home.