Landlords generally do not make a habit of spending money unless it will increase their return on investment (ROI). And lenders are not in the business of paying out cash to an investor’s tenants. However, a situation my arise when it is necessary to buy out a tenant for the purpose of saving time, money and the expensive inconvenience of evicting them.
Cash for keys is a less volatile and faster way to arrange for a tenant to vacate a property rather than submit everyone involved to a more costly and lengthy legal eviction. It gives the landlord a way to persuade their tenants to move out quickly and leave the rental property in good condition in exchange for cash and not having an eviction judgment on their credit report. Such agreements are legal in all 50 states, but regulations may vary, so check your local laws.
Buyout vs. Eviction
The choice to enter into a cash for keys agreement rather than opt for an outright eviction may arise from several different scenarios:
· The tenant failed to pay rent as agreed.
A landlord can evict a tenant for violating the lease or rental agreement by not paying their rent as agreed upon in the lease. As soon as the rent is late, the landlord can give the tenant a three-day notice to pay the rent or quit the property. The notice must state that the tenant has three days to pay their rent or move out of the rental unit. If the tenant does not pay their rent or move within the three-day period, the landlord can file an eviction lawsuit with the court.
· Lease violations or damage to the property.
When a tenant does not comply with the terms of their lease, the landlord can institute the same procedures as when the rent is not paid. Such violations may include owning a pet when not allowed, having more people living with them than are named in the lease, smoking, drug dealing, etc.
· Landlord’s financial reasons.
If the landlord wants to circumvent local rent control ordinances to raise the rent to market rate, they might present the tenant with a cash for keys offer. Once a rent-controlled tenant accepts such a buyout and moves out, the landlord is free to increase the rent as high as the next tenant is willing to pay. The landlord might also propose a payoff if they want to sell the property.
In San Francisco, a spectacular cash-for-keys transaction made headlines when a couple were paid a record $475,000 to vacate the 7-bedroom Presidio Heights penthouse apartment they had lived in for three decades. Due to rent control, they were paying what is estimated to be about half the current market value of the home. The property owner is currently renovating and upgrading the building and anticipates recovering the pay-off by doubling the rent with a new tenant.
· The rental property goes into foreclosure.
A tenant may pay their rent on time every month and obey all of the stipulations in their lease and still be presented with a cash for keys offer – this time by the landlord’s mortgage holder. If a landlord falls behind on their mortgage payments, their lender could start court proceedings to repossess the property. This will usually give them permission to evict anyone who lives there, including any tenants. If the bank or lender owns the rental and wants the tenants to vacate in less than 90 days, they may offer a cash for keys payment. The bank pays the tenants a predetermined amount of money to move out quickly.
Benefits of a tenant buyout
Every landlord dreads the necessity to evict a tenant. The cost of eviction in terms of their time, aggravation and court costs can easily cancel any profits on the rental unit for many months. Although it is not mandatory to have legal representation for an eviction, an attorney will be necessary if the tenant does not comply with the court order.
It might take a long while to get the tenant to vacate. Every day they remain in the rental is another day without income. Once they have finally moved out, the landlord will need to advertise the vacancy and prepare the unit for a new resident. If the tenant damaged the property, this would cause more rent to be lost, another mortgage payment to be made and more repair costs. And this process does not take into consideration potential break-ins while the unit is uninhabited. If the landlord had purchased Lease Guarantee, the back rent, damages and legal fees might have been covered.
Once the property manager determines that the non-paying tenant is never going to become current in their rent or that they have done too much damage to the unit, how is the owner going to get them out without going to court? An offer of cash for keys is often the best motivator and should incentivize the tenant to pack up their things and leave. After all, if they have had a problem paying their rent, a cash settlement would probably be very attractive to them. It could even pay for their moving expenses and a security deposit at another property.
Unfortunately, a tenant who has been ordered to move out will often respond by destroying the unit. A landlord who is reluctant to buy out a delinquent resident may find that repairs for such damage will cost more than the amount the tenant would have accepted as cash for their keys. This is another reason for carrying rental property insurance and having LeaseGuarantee in place. The property manager might prevent such destruction by making the offer of a cash buyout before the tenant can react violently.
Although they are losing their home, there are benefits to the tenant in addition to receiving a cash settlement. Since the agreement is voluntary, they will not have an eviction judgment on their record. If they were to challenge an eviction in court and lose, they might have to pay the landlord’s court and attorney’s fees in addition to the cost of their own attorney. The tenant will also receive a negative entry on their credit report which could result in their being turned down for future housing. (A formal eviction will appear on their public record for seven years.)
Communicating with the tenant
In order to complete the tenant buyout with a minimum of trouble, it is necessary to communicate in writing with the renter that they are in arrears and must pay in full or vacate the unit. This should be done via certified mail with a return receipt so that the landlord has proof of delivery.
Once they have received the notice, the landlord should call or visit the tenant to make the offer of cash for keys, making it clear that this is a positive solution for the renter. Negotiations should include the move-out date and the amount to be paid to the tenant. The landlord may also require the tenant to clean the residence. They may specify that the renter cannot take any real property that does not belong to them, such as appliances, furniture or landscaping.
If the tenant agrees to the terms, a written contract must be signed by both parties. (A Cash for Keys Agreement form is available at no cost to all AAOA members) Payment should be made by check so that there is an official record of the transaction. If the tenant is compensated in cash, both parties should sign the agreement as paid in full.
If the renter refuses to sign the agreement, the landlord can move forward with an eviction.
As mentioned above, a lender may offer cash for keys to the renters of a foreclosed home in order to avoid legal proceedings. After notifying the occupants that they need to vacate the property, the bank will make a cash offer to encourage the tenant to move quickly and to leave the home in good condition. The lender does this to prevent theft and vandalization of the property by an angry evictee and will conduct an inspection before the tenant is given their buyout money.
Avoiding tenant payouts
Evictions are stressful and will cost the property owner a great deal in lost rent, legal fees, cleanup, new locks and repairs. Unfortunately, if the tenant being evicted doesn’t have the money to pay their rent, they will most likely not be able to pay the court-ordered amount they owe.
Landlords and property managers can avoid the headache, time and lost income of having to initiate an eviction proceeding or a cash for keys situation by conducting comprehensive tenant background checks that include eviction history and landlord verification.
Overall, cash for keys agreements can be the perfect solution for not only landlords who don’t want to go through the complicated and expensive eviction process, but also tenants who need cash.