Cash for keys is a controversial topic whether you’re talking about a landlord & tenant or a bank foreclosing on a homeowner.
We’re going to discuss both situations but first… let’s drop a bomb.
Here’s how you do it.
Join your local landlord association and tell your new friends that you’ve discovered an amazing new investing strategy for landlords…
“It’s called Cash for Keys and it works like a dream. Whenever you have an eviction looming with a tenant, just offer them cash to move out instead of evicting them.”
Here’s what will ensue.
- Eye rolls
- Temple flares
- Verbal jabs
- A few people who agree with you
In this post, we’re going to discuss why cash for keys is controversial along with 5 tips and 5 mistakes landlords make when paying their tenants to vacate the property.
A table of contents for cash for keys:
- What is cash for keys
- 5 tips for cash for keys
- 5 mistakes with cash for keys
- Cash for keys agreement form
- Cash for keys amounts
- Cash for keys programs with foreclosures
As a side, we have discussed this topic on our podcast (over 200 episodes ago) feel free to listen in below.
Cash for keys is a way for a landlord (or bank in a foreclosure situation) to convince a tenant to vacate a property in exchange for an agreed upon sum of money. Although it may seem counterintuitive, cash for keys in many instances is less expensive than going through a lengthy eviction process. Typically the amount paid comes with stipulations based on the condition that the property is left in.
Cash for keys is common in situations where tenants can no longer afford the rent or are damaging the property. In other cases, it may be an option when a landlord purchases a new rental property and wants to move on from the existing tenants.
Follow these five tips to make your cash for keys experience go as smoothly as possible.
#1 Hold a Conversation
Approach the delinquent tenants and explain that they are violating the lease agreement and that you will be starting the eviction process. Outline what the steps for eviction are, the consequences, and the expense and the impact on their future.
A formal eviction stays on public record for up to seven years in most states (Oregon is five years). It can be difficult to find housing in the future with an eviction on record.
#2 Suggest the Alternative
Explain that they can have cash in hand if they agree to be completely out and turn keys over to you by a certain date with no damage to the property. Share the date and the amount you have in mind with the tenants.
#3 Get it in Writing
Use a cash for keys document (provided below) that spells out the details of the agreement and includes the amount and the date and time of the transaction. The agreement should state that if the tenants are not out, the eviction will move forward.
#4 Be Present on Moving Day
On move out day, be at the property with the paperwork and the check. After you do the walkthrough, sign the final papers and exchange the keys for the money.
#5 Proceed as if Vacated
Go ahead and take care of the property as if it were vacated or abandoned. Change the locks, get rid of any garbage and food, and do any maintenance and repairs you need to get it ready for the next tenants.
If something doesn’t happen according to the cash for keys plan that you have agreed to, you must proceed with the eviction process as outlined by your state.
Not every cash for keys scenario works out so cleanly. Many landlords find themselves in a pickle when they make easily avoided mistakes…
These are 5 common mistakes that get landlords in hot water when attempting to remove tenants from the property.
#1 Self-help evictions
Landlords cannot take matters into their own hands and make the tenant’s lives miserable by lock-outs, shutting off the utilities, refusing repairs or any other method to keep the tenants from accessing or inhabiting the property.
Not only is it illegal, the landlord can be on the hook for fines and have to pay the tenant for spoiled food, wasted utilities and in some states a set dollar amount per day they’re locked out.
#2 No harassment
It is illegal to physically or verbally threaten tenants, yell at them, stalk them at work or harass other family members. No matter how frustrated you are, always remain professional.
A looming eviction can be a very emotionally charged situation for the landlord and tenant. Try and remove the emotion as much as possible and clearly communicate the situation.
#3 Don’t negotiate (much)
Sometimes tenants will attempt to talk you up in the amount and if you keep agreeing, they may feel like you will negotiate even more.
You can take the approach of starting low and working your way up to the actual amount you want to pay, so tenants feel as if they are getting a great deal.
Or you can start high, hoping the amount will impress them, and stand firm. Just don’t get desperate and start offering amounts that you haven’t thought through or that are not financially worth it for you.
#4 Get proof of the transaction
Although it is called “cash for keys,” pay via check if possible. That way, you have an official record of the transaction. If you have negotiated to pay in cash, then make sure you both sign something that marks the transaction. Provide the tenant with a receipt and make a copy of it for your records as well.
#5 Don’t forget about the deposit
Cash for keys is separate from the tenant’s deposit and just because they leave doesn’t mean they forfeit that deposit automatically.
You still have to process the deposit as you normally would, which is to do a formal move-out inspection and deduct for back rent, damages, and unpaid utilities.
Most states require that you send tenants a written, itemized list of all deductions and any remaining amount. Forgetting this important step, even if the deposit is completely withheld for the above reasons could lead to legal action from the former tenant.
A cash for keys agreement form (sometimes called a cash for keys letter) should always be in writing. It needs to include the amount of money that tenants will receive and how that payment will be made. It should also include the deadline for turning over keys. The agreement should state that the landlord and tenant will both go through the property on moving day to assess any damages.
Just click here to download RentPrep’s free cash for keys agreement form.
The link above includes the cash for keys addendum that you will sign at the move out day.
Opinions will vary when it comes to the amount to offer for cash for keys with your tenant.
Keep in mind that the average tenant eviction costs around $3,500 in lost rent, court fees, attorney fees, and additional damages.
This question was posted in our private Facebook group RentPrep for Landlords.
Here are a few opinions on cash for keys amounts:
- Start at $250 and move up
- Offer exactly how much court fees would be
- Half of one month’s rent + security deposit
- Start low and negotiate
We’ve had Lee McEachern on our podcast (we discussed the rental application process) and he teaches property management courses along with managing 500+ rentals in the Bay Area.
I mention this because we tend to trust his judgment and he advocated for starting low and increasing your offer.
If you join our Facebook group you can see a section of the group called “Topics.”
In the image below you can see that we’ve tagged 17 different posts that you can read through where the topic of discussion is about cash for keys.
You can join our group by entering your email in the form below.
You will be emailed the link to the group along with the password you’ll need to provide.
Cash for keys isn’t always between a landlord and tenant. It can also be a situation between a homeowner and the bank that owns the mortgage. This scenario plays out the same way that a cash for keys situation between a landlord and tenant works.
The bank (landlord) wants to recover their property as quickly and with as little damage as possible. This is why the bank will offer an agreed upon amount of cash for the homeowner (tenant) to leave the property.
The biggest difference is that the stakes are much higher and that the bank has no interest in owning property.
A bank may offer $2,000 to $3,000 in a cash for keys agreement because the costs will add up much quicker if they go through a lengthy eviction. Many banks will not offer this without the homeowner bringing it up first.
The good news is that most tenants who can’t pay rent usually jump at the chance to have cash in hand and avoid a judgment on their records.
A favorite saying of mine is, “sometimes the juice isn’t worth the squeeze.”
I have come across landlords who want to go through with the eviction process so they can acquire the judgment on the tenant’s record and feel vindicated for the anguish they’ve gone through.
The idea of paying someone who causes you grief is a hard pill to swallow.
I always recommend is to take the emotion out of your decision making and look at it like a business. It may feel like you’re losing by offering cash for keys but your bottom line may end up winning.
To make sure you don’t have to go through this process again, give our tenant screening guide a read.
It will show you the warning signs of bad tenants and how to find the perfect renter for your property.