As a landlord or property manager, there are many times when you must deal with unforeseen circumstances within your rental property.
Sometimes, this could mean evicting the tenant, which is something the property owners try to avoid as much as possible.
However, there is an alternative for rental property owners. This is called a "cash for keys" agreement.
In simple terms, a cash for keys agreement is when a property owner or landlord offers the tenant money to move out of the property. Although it sounds simple, it could get complicated.
If you are not sure about how cash for keys works and want to find out, you've come to the right place. In this guide, we will be going over how to use this kind of agreement as well as how it can be beneficial to both the landlord and the tenant.
To begin, let's discuss exactly what the agreement typically consists of.
What is a Cash For Keys Agreement?
A cash for keys agreement is an agreement between the landlord and the tenant for the tenant to move out of the property in exchange for cash. This kind of agreement became popular after banks began offering cash for keys to people living in a foreclosed property.
Cash for keys can be very useful in various situations. One of the situations that is most common is when the landlord wants to remodel the property. Remodeling the property can take quite a bit of time and there are certain laws and regulations that apply when there is a tenant currently residing in the property.
The landlord may also resort to cash for keys if they want to move into the property themselves or change the lease to increase rent. Since these things cannot be done when the property is currently rented out, the landlord must find a way to get the tenant to move out.
One of the greatest benefits, however, is being able to avoid an entire eviction process.
Cash For Keys vs. Eviction
As mentioned earlier, one of the worst things that a landlord has to deal with is an eviction. An eviction process consists of a number of filing fees, attorney fees, and court fees. Apart from that, the landlord has to deal with a lack of rental income, which can last for more than a month.
Instead of going through this entire process, some landlords choose to offer the tenant cash to move out. Now, although it may seem counter-intuitive to pay an irresponsible tenant to move out, it can actually be for the landlord's benefit. Many property owners find that forming a cash for keys agreement with the tenant is cheaper than going through the eviction process.
The average cost of an eviction is around $3,500. Cash for keys agreements are around $1,000 to $3,000. Also, a cash for keys agreement can take a few days while an eviction process can take a few months. So, it is easy to see why a landlord will choose to pay the tenant to move out instead of going through with an eviction process.
So, now that we know about what cash for keys consists of, let's discuss the process of having your tenant agree to this kind of agreement.
The Process Of A Cash For Keys Agreement
To make sure that the cash for keys process goes well, it is important that everything is done correctly. It is essential that you try to convince your tenant to accept the agreement without forcing them or making any threats.
Below is an outline of the process to make the cash for keys method as successful as possible.
Confront the Tenant
The first step in the cash for keys process is to confront the tenant. This means going to the tenant and explaining that they are violating the lease agreement and are at risk of being served an eviction notice.
Then, you can explain to the tenant the entirety of the lengthy eviction process. Explain in detail the consequences, the expenses, and the way that it can affect their future and their security deposit.
You may then begin to explain how the cash for keys agreement may benefit both the tenant and the rental business. A tenant who is not able to make the rent payments may be more willing to accept cash to leave the property.
Then, you can being to explain how the cash for keys works.
Explain Cash For Keys to the Tenant
Most tenants do not know what cash for keys is, so it is important that the property owner explains what it is. Explain how, as a real estate investor, you are prepared to make a cash offer to the tenant for them to voluntarily leave.
Before making the offer, it is important to check with your state and local laws. These laws may dictate the offer that can be made in a cash for keys agreement. They may also dictate exactly how the process should occur and how discussions about it should be held. If you are not sure about your state's laws, you might want to check out DoorLoop's Laws Page to learn more.
After consulting with all the appropriate laws, you can share the date and amount that you had in mind. It is possible that this offer is rejected and that you will be forced to open an eviction process. However, if it is accepted, you can move on to the next step in the process.
Getting the Agreement in Writing
Similar to any other contract or agreement in property management, it is essential to get this in writing. This is to benefit all parties involved as it will minimize the risk of a dispute in the future.
The best way to do this is to use a cash for keys agreement form. This form typically consists of various clauses that explain how the move-out process is going to work. Included in the form is the move-out date, the amount being offered to the tenant, and the condition of the property. There should also be some sections on the tenant's security deposit, whether or not the tenant still owes money, and other important details.
The more detail that is included in this document, the better. It should also be stated that if the tenant does not leave the property after payment, an eviction will follow. After putting everything into the document, it is time to have the tenant sign it. It is always good practice to have the tenant sign documents first, that way the document cannot be held against you.
The final step in the cash for keys process is the tenant's move-out day. This is the agreed-upon date when the tenant is meant to evacuate the property. It is important that the landlord is present this day to make sure that everything goes smoothly.
This is also the time for the landlord to conduct a move-out inspection. This inspection involves a walkthrough of the entire property, making sure it is left in the appropriate condition. If you do not know about these inspections, or want access to a free checklist, make sure to visit DoorLoop's Guide To Inspections.
After everything has been finalized and the tenant has been paid, the property is officially vacated. This means that the owner can do with it as they please. This could mean either selling it, renting it out to someone else, or simply moving in.
This process may sound pretty straightforward, but there are some potential bumps in the road. Below, we will be explaining some of the potential issues that can arise as well as some practices to avoid in general.
Potential Issues With A Cash For Keys Agreement
Ideally, the entire process will occur without any problems. However, this isn't always the case. Below, we have outlined some of the potential issues that can arise in this process as well as how to avoid them.
Tenant Refuses To Move Out
One of the common issues with this process is when the tenant refuses to move out. Typically, this issue arises when the cash for keys agreement is not written properly.
In a solid agreement, the tenant is signing away their right to the property even if they do not comply. When an agreement contains such specifications, the tenant is essentially giving up their right to a trial and possession of the property. Then, it is very easy to obtain a writ of possession and have them removed from the property.
To avoid this, there are two things that should be done. First, every potential tenant should be thoroughly screened. By doing this, you can reject those renters who have a history of troublesome behavior. Second, an attorney should always be present to help in writing the agreement. This way, there is less risk for a legal dispute in the future.
A self-help eviction is a common mistake that many frustrated landlords tend to make. This kind of eviction is essentially when the landlord makes it so the tenant cannot access the property or safely live in it.
This could be done in a variety of ways. Some of the ways include cutting off utilities, changing the locks, purposely ignoring repairs, and much more. But, not only is this very frowned upon, it is completely illegal.
For doing this, the landlord can face a heft amount of fines and lawsuits and, in some cases, does not achieve what they wanted in the first place. So, in terms of ways to remove tenants, this is one of the worst ones.
Problems With Negotiation
Sometimes, a landlord may make the mistake of negotiating too much. It is important to constantly be weighing the costs and the benefits of such a transaction.
If the landlord continues raising the offer past a certain amount, it could become counter-intuitive. At one point, it could even be cheaper to evict the tenant. This is why it's important to give an initial offer, along with all the reasons it should be taken, and stay as firm as possible.
Tenant's Security Deposit
Another thing to always remember is the tenant's security deposit. Just because the tenant is forfeiting the property does not mean that their security deposit goes away.
Instead, the same process should be done as when a tenant normally moves out. This means using that money to pay for any excess damage in the property or any unpaid rent. Again, it is important to consult with your local and state laws to make sure that you are using the security deposit appropriately.
If you want to learn more about your state's landlord-tenant laws, make sure to visit DoorLoop's Laws Page.