The subject of cash for keys frequently comes up when a homeowner is facing foreclosure, but it can also be used by rental property owners. A cash for keys agreement may be one of the most useful tools a real estate investor can use, but it’s oftentimes overlooked.
- Cash for keys is an agreement involving paying the tenant a certain amount of cash to vacate a rental property.
- Lengthy and costly evictions may be avoided with a cash for keys agreement.
- Landlords put cash for keys agreements in writing in order to be legally enforceable.
- Cash for keys agreements can be a win-win for both the landlord and the tenant.
What is Cash for Keys?
Cash for keys is often a pragmatic and cost-effective way of removing tenants from a rental property. With a cash for keys program, a landlord offers a tenant a cash incentive in exchange for vacating the rental home.
For example, a landlord may decide the time is right to sell the rental property but the home needs to be fixed up prior to sale. Instead of waiting months for the lease expiration date to arrive, a cash for keys agreement can be used to incentivize a tenant to move out early.
Another situation in which landlords employ this tactic is on properties with rent control. If accepted by the existing tenant, cash for keys can allow landlords to renovate their units and increase rents to market value for new tenants.
Some property owners also offer cash for keys to a tenant that has violated the lease agreement by paying consistently late. By proactively removing a slow-paying tenant, a landlord can find a more reliable renter.
But more often than not, cash for keys is offered to a tenant who is already delinquent on the rent. By offering the tenant a small sum of cash in exchange for vacating the property, a landlord may be able to avoid an expensive and time consuming eviction.
According to American Tenant Screen (ATS), the average cost of evicting a tenant could easily run several thousand dollars or more in lost rental income, legal fees, and clean out and storage expenses. Even if a landlord is awarded a judgment against the evicted tenant, past due rent and expenses still need to be collected, which is sometimes easier said than done.
Why Landlords Offer Cash for Keys
While landlords can use cash for keys for a variety of different reasons, a common reason is to avoid a tenant eviction. There are four general legal reasons why a landlord may need to evict a tenant:
- Delinquent on the rent.
- Violating other lease terms and conditions, such as an illegal pet or nuisance complaints.
- Causing damage to the property beyond normal wear and tear.
- Engaging in criminal activity on the property, such as drug dealing or prostitution.
Is Cash for Keys Legal?
Yes, cash for keys is legal. The document is a legally binding agreement between the landlord and tenant to avoid having to go to court.
Before signing a cash for keys agreement with a tenant, a landlord should review the lease agreement and understand the landlord-tenants laws for the jurisdiction where the property is located. That’s because a cash for keys agreement will need to comply with local laws in order to be enforceable.
How the Cash for Keys Process Works
Cash for keys is a precise, well-thought-out strategy landlords use to remove tenants. There are several deliberate steps a landlord typically follows to encourage a tenant to accept cash for keys:
1. Serve an Eviction Notice (if applicable)
(If the tenant is not in danger of being evicted and you want to have them leave for a different reason, skip to point 2 below.)
A Notice to Pay or Quit is the first step in the cash for keys process and the eviction process. The notice informs a tenant who is behind in the rent that any past due amounts must be paid in full by the due date. If not, the tenant is required to vacate the property.
Many lease agreements include a “grace period” before a late fee is assessed and an eviction notice is sent. A Pay or Quit Notice requires proof of delivery, normally through a third-party process server or certified mail, return receipt requested.
2. Verbally Offer Cash for Keys
After the tenant receives the notice, a landlord can approach the tenant offering to “make a deal” to help the tenant avoid an eviction.
After explaining to the tenant the risks of a potential eviction – such as a blemish on the tenant’s credit report and a negative rental history – the landlord offers cash for keys as a winning solution for the tenant and the landlord.
If you’re offering cash for keys for a reason other than eviction, your biggest lever in getting the tenant to vacate will be how much you offer them. So think about the maximum amount you’d be willing to pay them, start with a lower offer, and negotiate from there if you need to.
The cash for keys offer should be specific, including the amount of cash offered, the exact date the tenant will vacate, and the condition the property will be left in to refund the tenant’s security deposit.
3. Use a Written Cash for Keys Agreement
The cash for keys agreement will need to be in writing and compliant with state law in order to be legally binding. A good property manager will have a legal cash for keys agreement, as will a local real estate attorney who specializes in residential rental property eviction.
4. Schedule a Signing Date
After a verbal agreement is reached, the next step is to immediately schedule a day and time to meet with the tenant and sign the cash for keys agreement. When meeting the tenant to sign, a landlord will review the terms of the agreement with the tenant to verify the cash payment due, the move-out date, and expected condition of the property when the tenant vacates.
Some landlords pay the tenant when the cash for keys agreement is signed, while others wait until the date of the move-out inspection.
5. Conduct a Move-Out Inspection
On the day and time agreed to in the cash for keys agreement, a move-out inspection is conducted in the presence of the tenant. By comparing the original move-in report to the current property condition, a landlord can easily tell whether there is damage caused by the tenant above and beyond normal wear and tear.
After providing the tenant with a copy of the move-out inspection report, the locks are changed and the property is made ready for a new tenant.
Again, some landlords pay the tenant after the move-out inspection is complete, while others pay the tenant when the cash for keys agreement is signed.
How Much Cash Should a Tenant Receive for the Keys?
There’s no standard payment amount that a tenant should receive from a cash for keys agreement. However, there are some general guidelines landlords follow when determining how much to pay a tenant to leave:
- Determine the average cost of an eviction where the property is located, then calculate the value of avoiding an eviction. Some landlords divide the average cost of an eviction by 50% and use that number as a starting point.
- Consider making a graduated offer based on how quickly the tenant moves out, with the largest amount of cash available when the tenant vacates the fastest. For example, the maximum amount might be paid for a one-week move-out, half as much for a two-week move-out, and even less if the tenant leaves by the end of the month.
- Think about avoiding round, even numbers when making a cash for keys offer to a tenant. Many landlords use a negotiation trick to make the sum appear more precise. So, instead of the cash offer being for $1,500 a landlord might offer a tenant $1,497.50 for vacating the property and returning the keys.
Tips for Using a Cash for Keys Agreement
A cash for keys agreement can be a win-win for both the landlord and the tenant. In order to make the most from the agreement, here are tips to follow and potential mistakes to avoid:
Make the Cash for Keys Agreement a Win-Win
- Be upfront and honest with the tenant about the consequences of an eviction without becoming emotional.
- Follow the state landlord-tenant laws and avoid violating fair housing laws.
- Put everything in writing so that the cash for keys agreement is legally enforceable.
- Move quickly once an agreement is reached by having the tenant move out as soon as possible.
Common Mistakes in a Cash for Keys Agreement
- Avoid negotiating with the tenant by explaining why the cash offer is what it is and standing firm.
- Do not violate the tenant’s rights by changing the locks or turning off the utilities before the tenant vacates.
- Keep the security deposit separate from the cash for keys agreement to have funds available for any damage caused by the tenant beyond normal wear and tear.
- Put the cash for keys agreement in writing and have the tenant sign, in the event that the document needs to be used in an actual eviction process.