Owning a rental property requires having a diverse skill set as well as an understanding of several concepts and strategies. However, only a small percentage of landlords are aware of the full range of tools that are available to them. One particular tool that most real estate investors and landlords are unfamiliar with is the cash for keys agreement. Using this agreement can be a highly effective strategy when dealing with bad tenants. So what is cash for keys? How does cash for keys work? And is cash for keys legal? Keep reading as we break down the concept of cash for keys for rental properties and show you how you can use it to get rid of bad tenants quickly.
What Is Cash for Keys?
In simple terms, cash for keys refers to the process of removing a tenant in exchange for cash. This is essentially a buy out agreement in which the landlord decides to pay a tenant to move out. It is a convenient way to avoid a lengthy eviction process. In fact, resorting to this option can actually save landlords a significant amount of money. Eviction costs can reach thousands of dollars, which is generally higher than the cash offer that would compel the tenant to evacuate.
Related: Evicting a Tenant: A Guide for the First-Time Landlord
It is worth noting that landlords are not the only ones who can offer a cash for keys deal to remove a property occupant. Mortgage lenders can also use a cash for keys move-out agreement to remove homeowners who have not repaid their debt. This allows them to resolve the situation in a quick manner and saves them the inconvenience of going through the foreclosure process.
Is This Type of Agreement Legal?
Cash for Keys programs are legal in every state. In fact, these deals are no different than any other type of out of court settlement. However, it is important to keep in mind that certain legal aspects vary from one jurisdiction to another. For example, rental laws in states like California lean heavily towards the tenant, including in matters relating to eviction. In Los Angeles county, evicting a tenant from a rent-controlled property is subject to proving good cause. Furthermore, the law regulates who can make a cash for keys offer on behalf of an owner. Under §10131 of the state’s Business and Professions Code, only licensed real estate brokers or salespersons working under the supervision of a real estate broker are authorized to solicit a tenant or offer a cash for keys deal.
How Does the Process Work?
Initiating a cash for keys eviction is fairly simple. However, landlords still need to follow some critical steps to ensure everything goes smoothly. Here are the steps you should take when using cash for keys on rental property:
- Make sure that you have a legal cause for evicting the tenant.
- Send an eviction notice to make your intentions known.
- Let the tenant know that you’re willing to offer them a better alternative to eviction.
- Present the tenant with the cash for keys deal.
- Send a cash for keys letter that specifies the amount of money the tenant will receive, the method of payment, and the deadline for handing over the keys.
As for how much money to offer, the amount will vary depending on various factors. But as a general rule, your maximum offer should be well below the average cost of an eviction. According to a TransUnion report, this figure is around $3,500.
When Should Landlords Use Cash for Keys?
Cash for keys offers can be made in a wide range of situations. Like we mentioned above, lenders can use them when dealing with delinquent homeowners or renters who are occupying a foreclosed property. As for landlords, here are three situations where cash for keys becomes a viable option.
1- Vacating a problematic tenant from a rental property
Landlords deal with a host of tenant-related issues. Examples of this include a tenant not paying rent and renters who damage the property or engage in illicit activity. In most cases, offering a cash for keys deal is the most convenient solution for both parties.
Related: What to Do with a Tenant Not Paying Rent
2- Removing an existing tenant from a rental property you just acquired
Another situation that might call for a cash for keys deal is wanting to remove a tenant who is occupying a rental property you just purchased. Evicting such tenants can be a difficult process and a cash offer might be the simplest way to convince them to vacate the premises.
3- Vacating squatters
Figuring out how to get rid of squatters can be a daunting task for landlords. Despite not having renters’ rights, these illegal occupants can actually force the eviction process. Needless to say, using keys for cash is the advisable approach in this situation.
A Few Tips to Guarantee a Smooth Transaction
Like anything in real estate, small details can be the difference between a smooth deal and a stressful one. The tips below should help you avoid some of the common pitfalls that make these transactions more difficult than they should be.
- Avoid threatening language or any sort of behavior that could be viewed as landlord overreach.
- Be as transparent as possible with the tenant and clearly explain what you’re planning to do in order to avoid confusion and miscommunication.
- Check lease regulations and renters’ rights in your state to make sure you’re acting within the law.
- Document the transaction and keep a copy of the receipt.
Related: How to Deal with Bad Income Property Tenants
The Bottom Line
A cash for keys agreement is without a doubt the most convenient option when it comes to removing tenants. The simplicity of this approach coupled with its cost-effectiveness makes it the ideal alternative for tenants and landlords alike.
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