A properly executed cash for keys agreement is one of the single greatest tools buy and hold real estate investors have at their disposal. Unfortunately, however, far too many real estate investors are unfamiliar with the benefits of this counterintuitive, yet effective, strategy. Done properly, in accordance with the law, a cash for keys proposal may be just the thing to save your investment from unwanted tenants.
Cash for keys in real estate refers to the timely and cost effective removal of a property’s inhabitants in exchange for cash considerations. It is ultimately nothing more than an alternative to a landlord’s worst nightmare: the eviction process. Understandably, most landlords will do anything they can to avoid initiating the foreclosure process, as it’s incredibly costly and time consuming. For all intents and purposes, the eviction process is rarely worth the anguish it causes most buy and hold investors. As a result, savvy landlords have come up with an alternative: cash for keys. In its simplest form, cash for keys is exactly what it sounds like: landlords will literally pay unwelcome tenants cash to incentivize their departure.
Most investors have found that it is easier to remove unwelcome tenants with a small sum of cash, and surprisingly cheaper. That’s right, it may literally pay to offer tenants money in return for a seamless exit. Cash for keys will, therefore, witness savvy real estate investors actually offer their unwelcome guests cash in return for the keys.
Consider the alternative: eviction. The eviction process has become synonymous with extended periods of litigation and expensive bills. What’s more, the tenant may continue to reside in the property while the proper authorities do their best to decide the fates of each party involved in the matter. In addition to legal fees and prolonged litigation, landlords may not be able to collect rent; the whole thing is a passive income investor’s nightmare.
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A successful cash for keys agreement isn’t the result of a quick discussion with tenants, but rather a well-devised strategy. In other words, you can’t simply show up on your tenant’s doorstep with a stack of money and ask them to leave. Instead, you will need to take several calculated steps, the first of which will require you to take drastic measures.
The first thing landlords should do, at least if they hope to get the tenant to agree to a cash for keys contract, is to send out an official eviction notice. That’s not to say you intend to evict the tenant (as I already alluded to, the whole idea between a cash for keys contract is to avoid the eviction process), but rather that you mean business. An eviction notice has a way of capturing the attention of tenants. Of course, if you threaten to evict your tenant, you must have legal cause. Do not threaten tenants with eviction if you don’t have a good argument for doing so. If you aren’t sure what constitutes a cause for eviction, here are some of today’s most common reasons tenants may be evicted:
Failure to pay rent
Causing damage to the property that exceeds the definition of “normal wear and tear”
Engaging in illegal activity on the property grounds
Only once you are certain you are legally able to evict a tenant should you threaten them with one.
Again, the eviction notice is nothing more than to let the tenant know you are serious. The idea isn’t to evict them, but rather to give them an ultimatum. Once you are certain they know you are serious, proceed to offer them a better way out: cash for keys. The idea is to provide the difficult tenant with the “lesser of two evils.” If you have done your job, it should be more appealing for the tenant to take the cash in return for the keys than to wade through the eviction process.
Provided the tenant agrees to a cash for keys contract, the next step is to get their acceptance in writing. According to FitSmallBusiness, 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.”
It is worth noting that the legal implications can’t be underestimated. The agreement you draw up carries significant weight, and is best left to a professional. I, therefore, recommend hiring a real estate attorney to draft your final cash for keys agreement.
Contracts are legally binding, and are designed to hold each party to the agreement in question. However, there are unique circumstances that may allow landlords to offer an incentive (in this case cash) in return for the keys to the home. That said, the circumstances will be dictated by local laws. Therefore, any investor consider offering cash for keys must first familiarize themselves with the tenant-landlord laws that govern their property. In other words, it is up to the landlord to first identify whether they are allowed to offer cash for keys or not. Since landlords and property managers are not allowed to harass tenants, moving forward with such an offer can be trick. It is a good idea to consult a licensed attorney before making the buyout offer. Once you have a legal representative, local laws will dictate how to move forward, how much money can be given to the tenant, how discussions progress, and under what circumstances a cash for keys deal is permissible. Investors must abide by the law if they are to offer a cash for keys deal, so be sure to look up local guidelines before doing anything. Once it has been identified that you can move forward, hire a legal representative familiar with the matter.
While a cash for keys agreement may be enacted for a number of reasons, there are generally four scenarios in which it makes the most sense for landlords:
Vacating Homeowners After The Foreclosure Process: Cash for keys offers aren’t relegated solely to homeowners. Lenders that repossess properties can use the cash for keys technique to remove delinquent homeowners once the property becomes real estate-owned (REO). In doing so, the lender may offer a cash incentive for the owner to move out, in return for the ability to show and sell the property to a subsequent buyer.
Vacating Tenants After The Foreclosure Process: Again, the bank may offer cash for keys in the event a delinquent loan turns into a foreclosure. That said, it’s entirely possible for renters to be living in said property. The bank may, therefore, make an offer to the renters (instead of the owner) to get them out of the property. Doing so is a lot easier than pursuing an eviction, and more cost effective.
Vacating Tenants From Rental Properties: Homeowners themselves may initiate a cash for keys agreement if they want to remove a tenant from their property and the lease. That said, a homeowner may use this strategy to remove existing tenants from a home they just purchased or a long-term tenant they already have a lease agreement with.
Vacating Squatters: It is a sad truth, but a reality, nonetheless: opportunistic “squatters” will illegally move into a vacant home and demand to be evicted. More importantly, evicting squatters may require landlords to actually follow through with the eviction process. While squatters have fewer rights than tenants, they can represent a huge headache for real estate investors unfortunate enough to have gotten caught up in the situation. As a result, cash for keys may once again be the easiest solution to get rid of unwanted guests.
The amount a landlord may offer will, first and foremost, be subject to laws. Some places limit landlords from offering certain amounts of money (if an at all). As a result, investors will first need to find out if offering cash for keys is legal in their area. Only once it has been determined cash for keys is legal can investors formulate an amount. That said, the amount will vary by location. Anecdotes suggest anywhere from $500 to $5,000 will suffice. That said, some stabilized markets have seen much more cash offered in an attempt to remove tenants.
A strong cash for keys agreement requires equal parts tact, respect, and trust. In addition to abiding by the law and respecting tenants, however, landlords should implement the following advice:
Hold An Honest & Transparent Conversation: Every cash for keys agreement needs to start with an honest and transparent conversation. Instead of avoiding confrontation, talk with tenants to ensure the lines of communication are open and ongoing. Doing so will help to avoid any confusion and outline any subsequent steps. Sometimes lengthy and drawn-out circumstances can be avoided with a simple conversation. That said, schedule a time to meet up with the tenants and let them know exactly what you are going to do.
Abide By The Law: The legal rights of tenants are complex, and can vary from state to state. It is important to familiarize yourself with each and every law regarding the removal of tenants. Do not attempt to remove a tenant from the subject property without fully understanding local laws and rights.
Suggest There Isn’t A Better Alternative: A cash for keys agreement is, hands down, the best offer a stubborn tenant will receive. Consequently, receiving money to move out of a home they don’t belong in is better than being evicted. That said, it’s important to let them know that there isn’t going to be a better offer in the future.
Write A Cash For Keys Contract: Offering tenants cash for keys should be accompanied by a contract that puts the agreement in writing. Be sure to provide a document that spells out the details of the agreement, not the least of which will include the move-out date, agreed upon sum, and the date of the transaction. More importantly, it should state that the eviction process will move forward if the criteria aren’t met.
Take Immediate Action: In the event of a successful cash for keys agreement, landlords must take immediate action and secure the property once the tenant is officially out of the home. At this time, change the locks on all of the doors and windows, clean things up, and proceed with any maintenance and repairs required to rent the place out again.
It is important to note that the things you don’t do in a cash for keys agreement can be just as important as the things you do. That said, here are some things you shouldn’t do:
Don’t Take Matters Into Your Own Hands: There are several things landlords can do to make the cash for keys agreement go according to plan, but there is certainly a limit to their actions. That said, landlords need to know their limits, and what they can’t do. Most notably, they can’t initiate any sort of forcible removal. They can’t make the tenant’s lives miserable by changing locks, canceling utilities, refusing repairs or anything else of a malicious nature; doing so will only make the process more difficult.
Do Not Threaten Tenants: It is illegal to threaten tenants with any sort of recourse. No matter how frustrating things may get, any sort of harassment is unacceptable. Therefore, landlords can’t let an emotional situation get the best of them.
Don’t Negotiate Too Much Landlords should take a strong stance in any keys for cash agreement, but that doesn’t mean there can’t be any negotiations. The key is to find a middle-ground; one that both the landlord and tenant can agree on. If for nothing else, a perfect cash for keys agreement is a compromise.
Don’t Forget To Document The Transaction: In the event a tenant accepts a keys for cash agreement, landlords must document the proposal. Whether the tenant receives cash or a check, be sure to document the transaction and provide a receipt. The landlord should keep a copy for their records.
Don’t Forget About The Original Deposit: A cash for keys agreement doesn’t have anything to do with the deposit. The deposit must be processed as it normally would have, despite the extenuated circumstance. Don’t assume the tenant won’t get their deposit back because of their “extended stay.”
A cash for keys agreement sounds counterintuitive to many people at first, but the right amount a cash make a lot more sense when the real cost of an eviction comes to light. That said, the average cost of eviction-related expenses can reach as high as $3,500, according to TransUnion.
Of course, the most costly part can’t even be calculated: the time. Evictions can take as long as three to four weeks, or perhaps longer in some areas. During that time, the tenant can stay in the property.
Otherwise known as the Home Affordable Foreclosure Alternatives program, the HAFA program serves as an alternative for those who are eligible for the government Home Affordable Modification Program (HAMP), but are denied a loan modification or can not avoid foreclosure. The HAFA program, not unlike a cash for keys agreement, HAFA will give homeowners the capital they need to do a “deed in lieu of foreclosure.” Instead of a tenant receiving money to leave, it’s the homeowner.
Initiating a cash for keys agreement isn’t necessarily an investor’s favorite strategy to remove tenants, but it may be the easiest and most cost effective when eviction becomes a reality. Once again, no landlord will be thrilled with the idea of paying unwanted tenants to leave, but it may be the best available option at their disposal.
Do you know how to start investing in real estate with little money? Does the idea of spending money to make money sound counterintuitive, or does it make sense to you. Please feel free to let us know your thoughts on the matter.