Does Cash For Keys include the Security deposit? 1 Other Question

27 Replies

1. If I offer a tenant $500 cash for keys, do I also give them the security deposit even though I don't have rent late into the month?
2. When exactly does one offer this? If grace period ends on 5th of month, sending a letter offering cash for keys right away sounds a bit rash, especially since if they end up paying, they know they can try to get paid in later months to leave.  But if you offer it after they still haven't paid from the pay or quit notice, it's so late into the month even if you only give them a couple days more to move. 

Just trying to establish my process for my tenant who lied about mailing rent, and process for future tenants as well! Thanks!

If you have a security deposit, you still must provide an itemized receipt within X days explaining your deductions. If you have no deductions, then you must return the security. You may be able to use the security to pay past due rents. You have to check your local laws. But it doesn't just disappear.

I would not do cash for keys after 5 days. NO WAY! Usually you do it after the notice and a few months have passed and they have made no attempt to contact you, and they maybe have told you they aren't leaving. UNLESS you really, really, really want to get rid of them. Cash for keys is a last resort before court.

Matt - Thanks for the input.

To folks out there who have used cash for keys in the past, do you give them the security deposit as well as the cash they were promised? Or is the money they were promised just taken out of the security deposit?

People talk about this everywhere and how great it is, but somehow this detail is regularly left out.

Ray - I didn't see your post at first. I think that's a good point about not doing it as early as 5 days, also a great point about the tricky legality of the deposit. It can't just disappear! However, if a landlord still has a non-paying tenant after "a few months" as you say, I would really question that landlord's processes. 

So the tenant doesn’t pay you and you think you should reward him with 500$? How’s that work ? He’s supposed to be giving YOU the cash , not the other way around lol 

If you expect to be successful in this business long term your going to have to change your mindset real quick on this tenant landlord relationship . If the guy won’t pay you give him a quit or pay then you throw his sorry butt out ..let him go live in a cardboard box !Cash for keys is the dumbest idea to be doing in this scenerio . Think of it as a Hail Mary last ditch effort . That is like giving your dog a T bone steak after it craps on the carpet . No no no . You don’t reward bad behavior bro . That’s not how you succeed in this field

Folks, I appreciate your opinions, but I'm looking for feedback from people who use cash for keys as a part of their strategy. Eviction is very expensive (i've done it several times), so cash for keys can be used at times to optimize profitability (Brandon Turner Blog here). 

It's very clear you disagree, but if you truly want to help me, let's let someone respond who does this strategy.

You can not just randomly keep a deposit.  Check with your local laws, but deposits can only be used for damage, not wear and tear and not rent  

So in theory they should get it all back if the unit is in good condition. 

@Allan Smith The deposit is technically the tenants money so you must return it or account for it in damages. I haven’t done KFK but you would not want to give them a penny of the kfk money until they leave the unit and sign something. Then I would not give them the deposit until I have ample time to inspect the unit, so two separate transactions. State laws vary so make sure you know your state laws regarding deposits and time limits on returning it.

@Allan Smith I disagree with the basic premise of cash for keys but here's your answer:

The security deposit is regulated by state law. When you have questions like this, it's important to know what your state law says. A good resource for state law is www.nolo.com and I also highly recommend their book, Every Landlord's Legal Guide. It includes state-specific laws and a ton of practical advice on every aspect of Landlording, including sample forms. 

I'm not going to study the state law for you but I'm pretty sure it will say something about using it only for specific purposes like unpaid rent, cleaning, or repairs. 

If you choose to pay the tenant to leave, I recommend putting the agreement in writing with something along these lines:

Landlord and Tenant hereby agree to the following:

Tenant will vacate the rental no later than noon on Tuesday, December XX, 2018. Landlord will verify Tenant has vacated and then will compensate Tenant $XXX.XX towards moving expenses within 24 hours. The security deposit shall be handled separately and in accordance with Tennessee law.

Bottom line: get it in writing and hold the tenant to it. How much will you pay? When will you pay them? Will you pay cash for keys and the deposit separately (recommended) or together?

I hope this was helpful.

.

@Allan Smith the security deposit is forfeited, as per our lease, for any lease violations. Not paying rent on time is a lease violation. So for us, prior to going to court, we’d offer cash for keys, but the security deposit is forfeited. (Now don’t get me wrong, if the tenant played hardball, we’d probably give them the security deposit back if it meant they wouldn’t continue to fight it. Otherwise, no.)
@Allan Smith I have used cash for keys once. I had a terrible woman and her 6 kids and 3 pitbulls living in half of a duplex I bought. When rent was due she of course didn't have all of it. I don't accept partial payments and told her as much. I also had a document I drew up with me offering her $1000 cash and letting her keep her rent for the month if she was out of the property end of month. She jumped on it and I explained that if she wasn't out in the month I would not pay her and I would start the eviction. $1000 was a lot of money compared to her 600 a month rent but I needed them out more than I needed the 1k lol. Once I rehabbed the unit I had it rented for $900 a month.

@Allan Smith

I used cash for keys in a SFR I had with a long tenant that I inherit when I bought the house.

I offered $300 if she left a clean and empty house. That was less than the $800 for an eviction. 

Deposit is dealt as you wrote in your lease agreement. 

Offering a bad tennat a bribe is done by some landlords. The primary goal is to protect the tenant from having a eviction on their record and to save the landlord time and money. To ask what others do is going to get a variety of answers based on the individual landlord. Untimatly you must offer enough

I believe if you want to bribe a tenant you should have already started the eviction process to be able to leverage the bribe as much as possible. If they do not accept a bribe to avoid the upcoming eviction they would not have accepted it prior to filing a eviction.

As noted deposits are regulated by the landlord tenant regulations but this does not preclude landlord from offering to return 100% of deposit or their first born child if they are desperate to get rid of a tenant with the least amount of effort. Tenants view the bribe as a route to avoid having a eviction on their record making it easier to find a new landlord. The next landlord will have no clue as to the type of tenant they are getting, likely the case with the existing landlord, and the situation repeates until a landlord finally evicts.

@Javier Marchena You are the guy for this question!

In TN, I can subtract from the deposit for unpaid rent, no problem.  So if I did the same thing you did, I'd offer $300 for her to move quick and clean, and then pro-rate rent out of the deposit, and then mail the remainder of the deposit to the tenant?

As this thread has highlighted, "cash for keys" means different things to different people. Ultimately, the real definition is whatever you and the tenant negotiate, within the bounds of your state's landlord-tenant laws.

I prefer to think of it (and we document it as such) as a Mutual Termination of Lease. This can be used when a tenant falls behind and needs to vacate, when a tenant simply asks to break the lease early, or even when a tenant signs the lease and pays the deposit, but never takes possession. 

The key is to document everything in a signed written agreement. And I firmly believe that a negotiated settlement between two parties (not a "bribe" as some referred to it above, LOL), is always preferable to an eviction. An eviction takes time and money, and ultimately is a lawsuit - if you forgot to dot an i or cross a t, there's always a chance of the judge siding with the tenant, and you're back to square one.

We use a simple 1-2 page Mutual Termination of Lease document outlining the following:

1. The existing lease document is hereby nullified (otherwise it would remain in effect)

2. When the tenant is vacating

3. How much of an early termination fee they are paying

4. What happens to their security deposit

5. Whether they will be refunded any money

6. Releasing the landlord/PM from liability etc etc.

With regards to the security deposit in particular, which was central to your original question, we typically treat security deposits just as they are intended, even if we are doing a mutual termination. Meaning, regardless of the terms of the mutual termination agreement, the tenant vacates, we inspect and deduct and damages, we apply the remainder to any past due balances, and the tenant gets refunded the balance (if applicable) . 

That being said, the security deposit can also be used as a bargaining chip in all of the above. For example: "Tenant, As you know, you're not likely to get any of your security deposit back after all of this shakes out. However, if you can be out of the unit before the end of this month, we'll refund you $500 (or whatever amount is appropriate and gets the job done) of it".

Not only is the money an obvious motivating factor, but more often than not, they desperately need it in order to vacate. They often want to leave, they're just broke and can't. So this can create an obvious win-win.

Ultimately, we always try to do what's in the best interests of the landlord: If it gets you possession of the unit 2-3 months earlier than an eviction, and avoids the costs, delays, and risks associated with an eviction, why wouldn't a landlord or property manager use this option? It may not apply to all situations, but it's another tool in the box.

Originally posted by @Allan Smith :

@Javier Marchena You are the guy for this question!

In TN, I can subtract from the deposit for unpaid rent, no problem.  So if I did the same thing you did, I'd offer $300 for her to move quick and clean, and then pro-rate rent out of the deposit, and then mail the remainder of the deposit to the tenant?

 Yes, as soon as the tenant is leaving you meet that person and exchange keys for cash, change the locks, and do an inspection with the tenant. Ask him/her her new address.

Later you follow your lease agreement on how to deal with the deposit. In FL you have some amount of time to send a certified letter with the deductions you are going to apply to the deposit and send the remaining back. Deduct owed rent if that is allowed on your lease (if not, you need to get a new lease).

"why wouldn't a landlord or property manager use this option?"

Because it hides the fact that they are a bad tenant and prevents future landlords from being able to properly assess the quality of a applicant. What should have been a eviction on a tenants record due to non payment of rent is now a spotless tenant record. Not much value in screening applicants if other landlords are intentionally concealing the fact that the tenant is likely to stop paying rent.

As we all know the majority of landlords do not view this as a industry and for that reason have no concern for other landlords. There is no loyalty among landlords. It is a dog eat dog business with little regard for others. 

Originally posted by @Allan Smith :

Matt - Thanks for the input.

To folks out there who have used cash for keys in the past, do you give them the security deposit as well as the cash they were promised? Or is the money they were promised just taken out of the security deposit?

People talk about this everywhere and how great it is, but somehow this detail is regularly left out.

 I don't - I'm almost completely against it. I don't say "totally" because nothing in life is ever so black and white, but I have a hard time imagining a scenario for my properties where I would pay a non-paying tenant to leave. Part of my investing strategy is to invest in landlord-friendly areas, so we can get a property back fairly quickly and still have some security deposit left besides. Maybe if I lived in a different area, where an eviction was a 12 month process, I would feel differently - but you're in TN, just like me. Evictions are pretty simple here. 

@Thomas S. - While I do understand your desire to warn future landlords about bad tenants, I've never seen a tenant with a great credit score, solid employment/income, no collections, and good references that also had evictions on their record. There are other screening indicators in an applicant's record that can be just telling as an eviction. 

Many attorneys and landlords stop processing an eviction case (even if one was started) as soon as they have possession of the unit (once you have possession, there's usually not a sound reason to continue to pay the court costs for a writ of possession). In many states, the loser in court pays the victor's legal expenses - making it risky pursue an unnecessary lawsuit.

The purpose of an eviction is to get possession of the unit. Nothing else. I would never pay for an eviction just for the sake of ruining a tenant's record and notifying their future landlords. It would be a waste of the landlord's time and money, and puts them at risk of paying additional legal expenses.

It's usually a much smarter business decision to negotiate a mutually agreeable termination of the lease. 

Originally posted by @Allan Smith :

Ray - I didn't see your post at first. I think that's a good point about not doing it as early as 5 days, also a great point about the tricky legality of the deposit. It can't just disappear! However, if a landlord still has a non-paying tenant after "a few months" as you say, I would really question that landlord's processes. 

In Chicago, evictions take months. Sometimes offering a month of cash is better than the eviction process. But not after 5 days of delinquency. I'd say approaching 30 you offer cash to leave by the end of the month.

Originally posted by @Thomas S. :

Offering a bad tennat a bribe is done by some landlords. The primary goal is to protect the tenant from having a eviction on their record and to save the landlord time and money.

The ONLY goal is to save the landlord money. Landlords don't care about tenants eviction record. In fact, I'd prefer to get the eviction and ruined credit. BUT, c4k is less expensive and less confrontational, and less time! For the person who says c4k is not good business sense, you don't know what you are talking about. Offering someone a month of rent to leave by the end of the month is a lot cheaper than an attorney (or your personal time if doing it yourself), AND the 3 months of lost rent that it takes to actually get them out.

Before I offered $500 to a tenant that was not paying I would put the money in the hands of a lawyer that specializes in evictions. If you are in a landlord friendly state the lawyer will have them out in less than a month and the security deposit will go to cover the months rent they owe you.

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