Everything You Need to Know About a Cash for Keys Agreement
Running a rental business can be challenging, especially when tenants don’t stick to their part of the lease agreement. When a tenant stops paying rent, damages the unit, or constantly disturbs neighboring tenants, landlords need to follow proper eviction protocol before requiring the tenant to move out. Evictions can be lengthy and expensive, causing delays in a landlord’s desired objective of releasing a tenant from their lease.
A cash-for-keys agreement works as a loophole to eviction by allowing landlords to quickly remove troublesome tenants from their properties without involving the courts. Instead of evicting the tenant, a rental owner can suggest a cash-for-keys deal where the rental owner pays the tenant to move out earlier than the move-out date stated in the rental agreement.
In this blog, we’ll discuss the legality of a cash-for-keys agreement, when such a deal would make sense, and why it’s better than an eviction. We’ll also cover five steps every rental owner should take to make sure a cash-for-keys agreement is successful, as well as five mistakes to avoid.
What are keys for cash?
A cash-for-keys agreement is a deal between a landlord and a tenant where the tenant agrees to move out of the property by a specified date in exchange for a certain amount of cash. While a cash-for-keys agreement is particularly beneficial when a rental owner needs to get rid of a specific tenant, a cash-for-keys deal is also a good idea when a property owner wants to sell a rent-controlled property or raise the rent to market rate.
In these cases, cash-for-keys deals are referred to as buyout agreements. Cash-for-keys agreements were popular during the housing crisis, typically because a landlord needed to get a tenant out of a foreclosed property.
Is cash-for-keys legal?
While cash-for-keys may seem too good to be true, this type of agreement is legal. Local and state laws often place restrictions on cash-for-keys agreements to protect tenants. However, as long as a property owner is not forcing a tenant to accept a cash-for-keys deal and both parties agree on the move-out date and lump sum amount, there shouldn’t be a problem.
When does a cash-for-keys agreement make sense?
A cash-for-keys agreement is a convenient way of clearing out a rental unit when needed. Property owners may extend a cash-for-keys deal in any of the following scenarios:
- When a tenant causes property damage.
- When a tenant can no longer pay rent.
- When a landlord wants to renovate the property.
- When a landlord wants to sell a property without tenants.
- When a landlord wants to increase the rent price to the market rate.
- When a landlord wants to move into the property themselves.
In most of these situations, the tenant needs to move out before a property owner can move forward with their plans for the rental property. If a tenant were to refuse to move out, the property owner would have to go through the strenuous process of evicting the tenant.
Why a cash-for-keys agreement is better than an eviction
Evictions are by far one of the most stressful situations rental owners can encounter. If possible, it’s best to avoid an eviction and instead pursue a different way to end a tenant’s occupancy.
Cash-for-keys for renters is a great alternative, because instead of spending money on filing and attorney fees in hopes that the court will uphold your eviction request, you can pay the tenant directly and have certainty that they will move out.
If you’re asking your tenant to leave because they’re unable to keep up with monthly rent payments, your risk of financial burden is high. Offering a tenant cash to move out could save you months of unpaid rent and help you restore rental income faster than an eviction would.
It may seem counterintuitive to pay an irresponsible tenant to move out; however, it’s important to keep things in perspective. The average cost of an eviction is around $3,500, and that’s not counting months of unpaid rent or property damage caused by the tenant in retaliation for the eviction. A standard cash-for-keys agreement, on the other hand, costs property owners between $1,000 and $3,000 when all is said and done.
In addition to being cheaper, cash-for-keys deals are also faster. Finalizing an eviction process can take several months, whereas a cash-for-keys agreements can take just a few days.
5 steps for a successful cash-for-keys agreement
When compared to an eviction, a cash-for-keys agreement is a lot more efficient. However, there are certain things property owners should keep in mind to make sure there are no hiccups in the process.
1. Understand local laws and regulations governing cash-for-keys
Extending a cash-for-keys agreement to a tenant is permissible by law; however, state and local laws may restrict the kind of offer that can be extended.
Depending on the area in which your rental is located, you may need to offer your tenant a minimum cash offer or wait a certain amount of time before making the offer. Make sure you are aware of all local regulations before presenting your tenant with a cash-for-keys agreement.
2. Talk to the tenant about their risk of eviction
Talking to your tenant either in person or over the phone can help set the tone for a successful cash-for-keys agreement. You should calmly explain to your tenant the reason you’d like for them to leave, whether it be due to their behavior or changes in your plans as a rental owner.
If you’re asking your tenant to move out due to their lack of responsibility, you should let them know you’re considering sending them an eviction notice. Kindly remind them of the consequences of having an eviction on their record and how an eviction could affect their security deposit.
You should then explain how cash-for keys can be mutually beneficial to both the landlord and the tenant in these kinds of situations. Tenants who are struggling to make regular rent payments may be more willing to accept a cash-for-keys deal due to their lack of funds.
3. Explain how a cash-for-keys agreement works
Most tenants don’t know what a cash-for-keys agreement is or how it works. It’s important for property owners to accurately convey not only how a cash-for-keys agreement would benefit the tenant, but also what it requires of them. Your tenant should understand exactly how much money they’ll receive to move out early and by what date they need to be gone.
This is especially important if your tenant doesn’t understand English very well or if they're an elderly tenant, as you want to ensure that they come away from your discussion confident in their understanding of the agreement. Tenants should understand that this is a voluntary leave and that you aren't forcing them off the property.
4. Get the agreement in writing
To further protect yourself from potential accusations in the future, it's best to put a cash-for-keys agreement in writing. Acknowledge your original lease agreement and make it clear that both parties have decided to terminate it early in exchange for a specific sum. Try to sign a written agreement with your tenant as soon as they agree to it in case a tenant decides to change their mind or request a greater cash offer at a later date.
A standard cash-for-keys agreement should include the move-out date, the amount being offered to the tenant, and how the move-out process is going to work. It’d be wise to also include the condition of the property, what’s going to happen with the tenant’s security deposit, and whether or not a tenant still owes you money.
5. Be present on move-out day
Either you or a trusted property manager should be present on the move-out day to confirm the tenant is out of the property and a rental walkthrough is conducted. Comparing your rental walkthrough checklist from the day the tenant moved in to the checklist on the day the tenant moves out will help you identify property damage. Whether you pay the tenant after a move-out inspection or after the cash-for-keys agreement form is signed is up to you.
5 mistakes to avoid with a cash-for-keys agreement
Now that you’re aware of best practices for entering a cash-for-keys agreement, here’s what you should avoid:
1. Being verbally aggressive
Tensions can run high if a tenant hasn’t paid their rent in months and refuses to accept a cash offer to move out, as it might start to feel like you won't be able to find a solution. While this can be frustrating, it's of the utmost importance that you handle the situation professionally and respectfully.
Getting physically or verbally aggressive with a tenant or otherwise harassing them is not only morally wrong, it can land you in legal trouble.
2. Conducting a self-help eviction
It’s also important to avoid initiating a self-help eviction, which is when a landlord makes it so that the tenant can no longer access their unit or live comfortably on the property. When frustrated landlords aren't able to evict their tenants, they may decide to make their tenant’s life miserable by locking them out, cutting off utilities, or refusing necessary repairs.
Engaging in this kind of behavior as a landlord is detrimental, not only to your reputation but also to your finances. If a tenant files a formal complaint, you may have to pay the tenant for spoiled food and other inconveniences. In some states, tenants are entitled to a certain dollar amount per day that they’re locked out of their apartment.
3. Negotiating too much
When negotiating a cash offer with a tenant, try your best to avoid excessive negotiation. Start low and work your way up depending on the actual amount you’re willing to pay. Tenants will often keep raising the price of the offer if they feel like they can get a better deal or sense that you need them out of the apartment immediately.
You can also start high and simply stand firm in your decision. Whatever you do, don’t let negotiations drag out, as this weakens your position.
4. Forgetting the tenant’s security deposit
If a tenant hasn’t caused any serious property damage during their stay and has paid all of their rent in full, there’s no reason to keep their security deposit. Furthermore, a cash-for-keys agreement is separate from the tenant’s security deposit. Just because a tenant is leaving the property early at your request doesn’t mean that they forfeit their deposit.
Property owners should process a tenant’s security deposit as usual by conducting a formal move-out inspection and deducting for damages beyond normal wear-and-tear, unpaid utilities, and late rent. In most states, tenants are entitled to an itemized list of all deductions from their security deposit. Failing to provide this list could lead to legal action in the future.
5. Not keeping an official record of the transaction
While it may be easier to hand a tenant cash, this payment method doesn’t allow you to easily document the financial transaction. It’s always best to pay the tenant via check or wire transfer, as the possession of proof-of-transaction helps verify how much you paid the tenant and on what date. If the tenant were to come back later and claim that they weren’t paid a fair sum, you’d have proof that you paid them accordingly.
How much money should a tenant receive in a cash-for-keys agreement?
When participating in a cash-for-keys agreement, there are several ways that a property manager might determine how much money tenants receive. No matter what method landlords choose, they must keep in mind that in most jurisdictions across the country, tenants are entitled to receive either an amount equal to half a month’s rent plus the security deposit, or a full month’s rent.
Some rental property owners offer the tenant an amount equal to court fees in an eviction case, which could range from $1,000 to $3,000. Others divide the average cost of an eviction by 50% and use that number as the starting dollar amount for negotiation.
The amount you need to pay your tenant will depend on where your property is located and the cost of living in that area.
The bottom line on cash for keys agreements
Cash-for-keys agreements allow property owners to vacate their properties quickly and avoid a lengthy eviction process. They can also be financially beneficial to tenants who are willing to voluntarily leave the rental unit early in exchange for a lump sum of cash.
It’s important to keep in mind a state's landlord-tenant laws regarding cash-for-keys agreements, as well as best practices to avoid getting into any kind of legal trouble. Calmly explaining to your tenant how keys-for-cash works and why it’s financially advantageous for them can help you achieve your goal.
Always avoid exhibiting aggression towards tenants, conducting self-help evictions, over-negotiating, failing to return security deposits, and forgetting to record proof of transactions. These are harmful behaviors that could come back to haunt you in the future.
When approaching a cash-for-keys agreement from a respectful and informed perspective, you're setting yourself up for success!