A cash-for-keys agreement is used when a landlord offers a tenant a sum of money in exchange for the tenant vacating the property and leaving it in good condition. It can be an effective alternative to the formal eviction process.
What Is a Cash-for-Keys Agreement?
A cash-for-keys agreement (or a tenant buyout agreement) is a deal a landlord offers a tenant. The landlord distributes a specific amount of money if the tenant agrees to leave the property. Most of these arrangements require the tenant to move out by a certain date and leave the property in good condition.
It incentivizes tenants who have violated the terms of their lease agreement. For example, tenants who don’t pay rent, engage in illegal activity, or repeatedly cause noise complaints may be difficult to remove through eviction, as it can be a drawn-out process. Instead, landlords can use cash-for-keys agreements to motivate tenants to leave.
Cash-for-Keys vs. Eviction
Explore the differences between cash-for-keys and eviction in terms of several factors:
- Legal Process: Cash-for-keys is an informal process between a landlord and tenant that doesn’t involve the court. An eviction involves the court to make the tenant leave the property.
- Timeframe: Cash-for-keys only takes a few days, while the eviction process can take several months.
- Cost: Cash-for-keys is typically more affordable than an eviction. Even though you have to pay the tenant a sum in a cash-for-keys arrangement, it’s a fixed amount and won’t accumulate into lost rent and legal fees like an eviction can.
- Impact on Tenant: Cash-for-keys is a seamless process for the tenant, as it doesn’t go on their record. However, an eviction remains on a tenant’s record and can make it more difficult for them to find a new living situation.
- Voluntariness: Cash-for-keys is voluntary for both parties. Alternatively, an eviction is involuntary for the tenant. The landlord initiates the latter process and carries it out through legal means.
Benefits of Cash-for-Keys
Here are some benefits of cash-for-keys:
This Agreement Lets Rental Property Owners:
- Avoid a lengthy eviction process.
- Restore their rental income.
- Save the reputation of their rental business.
- Seek a more responsible tenant to replace the one who’s leaving.
- Save on expensive attorney fees they may incur with formal eviction.
- Save on the missing rent payments during the eviction process.
Cash-for-Keys Process
Read about the steps in the cash-for-keys process so you can reap the benefits of this strategy for your rental business:
Step 1 – Consider Issuing an Eviction Notice First
Issuing an eviction notice first can be advantageous. It may encourage the tenant to take the impending cash-for-keys offer seriously, as they’ll learn that you’ll pursue eviction if they don’t accept the offer.
However, an eviction notice may cause strained relations and heightened tension, making the tenant less willing to cooperate during the cash-for-keys negotiation process.
Evaluate the situation, your tenant’s temperament, and your long-term goals for your rental property to determine the best approach.
Step 2 – Decide If It’s the Right Choice
If you issue an eviction notice, decide if you want to offer cash-for-keys. Some rental property owners prefer eviction when dealing with an unruly tenant because they want to ensure the tenant’s violations end up on their record. Others prefer to remove disorderly or irresponsible tenants quickly and avoid court fees.
You can initiate a cash-for-keys arrangement without first issuing an eviction notice. Evaluate your situation and seek legal advice to make the most informed decision possible.
Step 3 – Communicate Your Intentions
If you proceed with a cash-for-keys arrangement, clearly communicate your intentions to the tenant. Explain the reason for the situation, whether they have unpaid rent or have been disturbing other tenants.
Be transparent if the reason doesn’t relate to the tenant’s conduct. For example, you may want them to move out because you want to change the use of the property, perform significant renovations, move into it yourself, or sell the property.
Step 4 – Allow for Negotiations
Provide a starting amount that you’re willing to provide to the tenant. Let them negotiate, as they may need more to cover mover and relocation fees.
You may also allow them to leave some of their belongings behind. If they don’t want to take some items with them because they’re a hassle to move, letting a tenant keep some items on the property may encourage them to agree to the arrangement.
How Much Money Should I Offer?
The amount you offer is highly situational, as it depends on factors like the tenant’s specific circumstances, the property’s condition, the current market conditions, and the property’s location. You may start with a higher amount to incentivize the tenant to move out quickly.
The typical amount can range from several hundred to several thousand dollars. It may match the cost of the tenant’s security deposit or one month’s rent.
Step 5 – Draft a Form
Once you negotiate all applicable terms, draft a cash-for-keys form. Highlight all relevant terms, including the following:
- Both parties’ identifying information
- A property description
- A move-out date
- The condition the property must be in when the move-out date arrives
- Any non-disclosure agreements (NDAs) that state the tenant can’t discuss the arrangement with anyone else
- The buyout amount
- The payment schedule (one lump sum versus installments over time)
Obtain both parties’ signatures when everyone agrees to the established terms.
Step 6 – Conduct a Move-Out Inspection
Conduct an inspection on the move-out date. Ensure that the property is in the condition that the agreement outlined. If the tenant didn’t clean properly or left behind some of their belongings when the agreement stated otherwise, you may withhold part or all of the buyout amount.
Step 7 – Use the Property How You Wish
Once the tenant moves out and you disburse their buyout amount, you can use the property how you wish. You can have a new tenant move in, ensuring to screen them with a thorough application. Once you find the right candidate, create a comprehensive lease agreement to ensure they understand all the terms.
Alternatively, you can move into the property, have a family member move in, put it up for sale, or fulfill any other desired plans.
What to Avoid When Creating a Cash-for-Keys Agreement
Performing a Self-Help Eviction
A self-help eviction is when a property owner tries to prevent a tenant from living on the property or evict a tenant in a manner that breaks the state’s landlord-tenant laws. For example, it would involve the landlord removing a tenant’s items, turning off the utilities, or changing the locks. Check state and local laws for specific restraints.
If you attempt to conduct a self-help eviction, you could be subject to legal repercussions. You may also have to reimburse the tenant for wasted utilities, spoiled food, and other expenses that the self-help eviction incurred.
Forgetting the Security Deposit
A tenant’s security deposit is separate from a cash-for-keys transaction. If a tenant leaves according to a cash-for-keys arrangement, you may still have to repay their security deposit, depending on the terms in the original lease agreement. A former tenant may pursue legal action against you if you forget or purposefully neglect to pay them their security deposit back.
Not Keeping Transactional Proof
If possible, issue the payment via a check so the tenant can’t claim that you didn’t pay them the agreed-upon sum. If you use cash, create a receipt and distribute a copy to the tenant.
Engaging in Excessive Negotiations
While you can engage in some negotiations, ensure to establish a limit. Know how much you’re willing to pay before you begin negotiations, and don’t exceed this figure. Whatever you decide for your limits, you must ensure you don’t force the tenant into the agreement.
Violating the Fair Housing Act (FHA)
Comply with the Fair Housing Act to prevent accusations of discrimination. Ensure any reason you present to the tenant for offering a cash-for-keys agreement doesn’t relate to factors like the tenant’s sex, gender, sexual orientation, color, race, familial status, religion, national origin, and disability.
Harassing the Tenant
Please don’t harass the tenant or be persistent about them entering the agreement. Both the tenant and landlord should enter a consensual written agreement. If the tenant refuses, you can pursue the formal eviction process.
Cash-for-Keys Agreement Sample
Download a cash-for-keys agreement form below in PDF or Word format.
Frequently Asked Questions
Is Cash-for-Keys Part of the Foreclosure Process?
Cash-for-keys is a common way to get tenants to leave rental properties, but it can also be a way for a lender to avoid evicting a homeowner after a foreclosure. A lender may offer a homeowner a sum of cash if they voluntarily leave the foreclosed property, allowing them to take back the property more easily.
Is Cash-for-Keys Legal in All 50 States?
Cash-for-keys is generally legal in all 50 states, but landlords must abide by local and state laws when drafting the associated form.
Please note that the tenant should freely sign this agreement without coercion. Both parties should have ample time to seek legal counsel to ensure they can protect their interests.
Does Cash-for-Keys Affect a Tenant’s Credit?
No. Cash-for-keys is a mutual agreement between the landlord and tenant. Creditors will not know about the exchange.
Is Cash-for-Keys Extortion?
Cash-for-keys is not extortion as long as both the landlord and the tenant enter the agreement willingly and with adequate knowledge of the situation.
Is Cash-for-Keys Taxable?
Yes. The IRS considers this sum of money taxable income for the tenant who receives it. Tenants report this income on Form 1099-MISC in Box 3.