As a landlord, you know that removing a bad tenant can quickly become an urgent priority.
Eviction should be your first thought in this situation. However, the costs of eviction can be devastatingly high. Evictions are extremely expensive, and they take weeks to months at a time to see through to completion. If your tenant decides to fight the eviction, this adds another layer of stress, lawyers, and court appearances.
To avoid a long and tedious eviction, some landlords go another route: “cash for keys.” A cash for keys agreement is when a tenant agrees to move out in exchange for cash.
Many landlords see this method as unseemly and distasteful. From your perspective, it’s also highly unjust. Your tenant is the one who broke the agreement, why are you paying them? Despite this valid point, cash for keys often works. If the math checks out and this is ultimately the fastest and cheapest way to remove the bad tenant, cash for keys might be worth it.
If you do decide to use cash for keys, here are six tips you should know.
#1 Use It Sparingly
There’s a reason why many landlords choose not to use cash for keys. There are risks associated with this approach that you should understand before choosing to proceed.
For example, if word gets out that you frequently use this approach, tenants who would otherwise not be qualified to rent your units will be more encouraged to apply and live in your properties. If they know you won’t evict them when they default, what’s the risk for them?
There’s also the chance that cash for keys simply won’t work. If your tenant refuses a cash offer, you’ll be forced to initiate the eviction anyway. Plus, it’s more likely your tenant believes they have a legal reason to stay, which means they might fight the eviction.
Before you decide to use this approach, ask yourself some basic questions: How quickly do I need to remove this tenant? Is the formal eviction process an option? Is cash for keys legal in my state?
Only proceed if resorting to cash for keys is a better option than the eviction process, during which you’ll almost always have the upper hand.
#2 Weigh the Pros and Cons
Like any decision you make as a landlord, cash for keys shouldn’t be an impulsive choice. First, weigh the pros and cons of going this route.
Pros of cash for keys include:
- Quicker than eviction
- Less expensive than eviction
- Simpler and less stressful
Cons of cash for keys include:
- Requires you to pay the defaulting tenant
- May damage your reputation
- No legal protections
Depending on your individual situation, any of these pros or cons might outweigh the others. If you’re struggling with vacancies and hurting for cash, now might not be a good time to pursue an expensive eviction. Or maybe you could afford one, but don’t have the time. Ultimately, you should pursue whatever option is the best business decision.
#3 Start Small
If you’ve decided to move forward with cash for keys, we recommend starting small initially. For example, maybe you offer the tenant an additional portion of their security deposit back if they agree to leave quickly.
If your smallest offer doesn’t convince them, it’s up to you to decide how much you’re willing to increase your offer. Maybe you offer to add a small percent of the rent or waive remaining utility bills.
It’s also a good idea to set a maximum offer in your mind before approaching the tenant with your small offer. Don’t be pressured in the moment to increase an offer farther than you’re comfortable with.
#4 Negotiate Only When Necessary
Your goal with cash for keys should be to negotiate as little as possible and retain control of the situation. While this strategy is technically a negotiation, you don’t want to let a defaulting tenant feel like they have more power than you do. Remind your tenant that you can and will still evict them if they don’t accept the offer you’re generously providing.
#5 Never Transfer Money Before the Keys Are Returned
Like the above point, regulating the situation means being smart about how you facilitate the transfer. Never give the tenant any money before you have their keys in hand. The exchange should occur all at once, after the tenant has completely moved themselves and their belongings out of the unit.
The last thing you want is for your tenant to abandon the property with your money, leaving you to clean up their belongings. Make cleaning out the unit part of the agreement to receive the cash.
#6 Reevaluate Your Tenant Screening Process
Lastly, if you find yourself using cash for keys frequently, it’s time to reevaluate your tenant screening process. Frequent bad tenants who default on rent or damage the property usually mean your screening process isn’t thorough enough to weed out bad apples. Be sure you’re including a credit check, criminal and eviction histories, income verification, and landlord/employer references in your screening process.
Cash for keys isn’t the most ideal strategy, but it often works and it’s something to keep in your back pocket for rainy days. By keeping these six tips in mind, you can use cash for keys successfully with the occasional bad tenant.