CASH FOR KEYS:
BEST PRACTICES…AND WHY IT MIGHT MAKE SENSE FOR YOU
As a general rule of thumb, you get what you reward for. As billionaire investor Charlie Munger puts it, “if you want ants to come, you put sugar on the floor”. So the idea of giving money to an uncooperative tenant to get them to vacate your property seemingly rewards their recalcitrance. But, sometimes you might be so fed up with a tenant that you’re looking for a quick solution. Depending on where you live, the cost and timeliness of the eviction process might push you toward entertaining other options. It’s always important to keep your eye on your long term goal (as a real estate investor, you are running a business), and if timely removal of that tenant saves you money when all is said and done, it might be the right move. While we don’t typically recommend this course of action, if you’re going the ‘cash for keys’ route, there is a best way to do it.
LEARN MORE: THE IMPORTANCE AND POWER OF ALIGNED INCENTIVES
LEARN MORE: THE APPEAL OF ‘CASH FOR KEYS’
CASH FOR KEYS: BEST PRACTICES
‘Cash for keys’ can be the most effective way to get back to making money with your property, but it comes with some risks. Follow these practices to minimize those risks as much as possible:
1. A TIGHT TIMETABLE:
‘Cash for keys’ needs to happen immediately. If you decide to make that offer, you cannot allow the tenant to dictate the timetable. More often than not they’ll ask for a couple weeks or until the end of the month to get their affairs in order. Your goal is to get them out ASAP. When making this offer you need to tell them that they need to leave today, tomorrow, or by the weekend. That lets them know that urgency is part of the deal.
2. A GRADUATED RATE DEDUCTION:
To return to Munger and the power of aligned incentives, you also want to create a graduated rate. For example, “if you leave today, I’ll give you $2000. If you’re out by tomorrow, it’ll be $1800, and the day after…”. You need to create a structure that makes getting out now attractive to the tenant. If you skip this important step, and give them until the end of the month…it is almost a guarantee that they will be there until the very end of the month, and maybe even beyond. Nothing will change without incentivizing urgency. And then you’ll end up having to file for eviction anyway.
3. INSPECTION WALK THROUGH:
On the day the tenant agrees to leave on, you need to do a walk through inspection with them before you exchange money and keys. You need to inspect the property for any debris left behind, any intentional damage such as fist holes or destroyed countertops, anything that is going to be costly to replace or remedy that is beyond “ordinary wear and tear”. Use that walk through as a way to justify any cash withholding necessary due to excessive damage to the property.
4. BRING SECURITY WITH YOU
Item 3 (the inspection walk through) is an important one, but it can obviously be a bit uncomfortable. There is strength in numbers and you want to bring some sort of security (not police) so your party is larger than that of the occupants. Do not go alone. Like a mother bear protecting her cubs, people can be especially unpredictable when it comes to the potential of their being without a place to live. You want a team that demonstrates strength and the ability to enforce the removal to decrease any chance of an upset tenant thinking violence could be an effective option.
5. WRITTEN AGREEMENT
Upon the exchange, tenants need to sign an acknowledgement that they are vacating the premises and acknowledge that any return to the property is trespassing. A simple document that the owner (or owner’s representative) and the tenant sign that is dated and includes the property address will suffice.
6. CHANGE THE LOCKS
As soon as the (former) tenant is out, it is imperative that you change the locks (to the unit and exterior) immediately. You’ve had to resort to ‘cash for keys’ because they’ve acted outside the lease so there should be no benefit of the doubt in terms of their following expectations willingly going forward. Copying keys and/or sharing them with friends or family should be considered a possibility or likelihood. Nexus Property Management® recommends that all our clients use Kwikset Locks so they can rekey their doors quickly and easily.
LEARN MORE: TENANTS DOING DRUGS IN YOUR PROPERTY? WHAT DO YOU DO?
LEARN MORE: HOW BEST TO HANDLE TENANT VS. TENANT CONFLICTS
CONCLUSION: CALCULATING RISK AND REWARD
Successful investing of any kind, not just in real estate, comes down to effectively analyzing risks and rewards. The eviction process is the way the legal system supports property owners and their need to remove tenants from their property. For that reason, in combination with the natural risks it entails, ‘cash for keys’ isn’t a reliable go-to strategy, but from time to time, it might be the right play for you. Following the process outlined above will give you the best chance at successfully removing a problematic tenant quickly. An even safer play is to hire a professional property management company to both assist with and avoid ending up in dire situations like this. To learn more about the services, pricing, and the stirling reputation of Nexus Property Management®, contact one of our teams at any of our five New England locations.
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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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