3 Owner Motivations Behind Cash for Keys/ Tenant Buyouts

Cash for Keys simply comes about because landlords have a motivation. Meaning, landlords have an upside in making a unit vacant. The motivations vary, but all of them are directly related to the local eviction and rent increase restrictions. The goal is to strategically stabilize and reposition properties.

Reposition Underperforming Units

Buyouts can be used to vacate and remodel units in which the rents are low. Given rent increase restrictions, often coupled with hands off landlords, rents for long standing tenants fall behind market rents. Owners are wiling to pay tenants to permanently move out of units so that the owner can remodel the unit to match market rental demands of tenants, and receive a higher rent. While there is a cost for legal fees, paying the tenant, and paying for the remodel, that money is often recouped within a few years with the new market rent. The property also gains immediate equity due to increased cash flow.

This bodes well for landlords that wish to keep their assets, usually apartment buildings, and want to maximize the income for themselves and their heirs. It also helps if an owner is looking to sell their asset and fetch the highest price by offering a “turn key” or cash flowing building.

Prepare to Sell

Similar to the repositioning, owners look to do ‘Cash for Keys’ with tenants so they are able to sell the property entirely or partially vacant. Given the onset of eviction restrictions post-COVID, owners of many single family homes and condos that were previously without eviction restrictions, now are not able to simply serve 60 day notices in many local jurisdictions. In those jurisdictions wanting to sell your property may not be grounds to end a tenancy. Owners offer buyouts to those tenants so that the property can be listed vacant making it much easier to sell. For multifamily properties, owners may also want to get vacancies to be able to sell their building with immediate upside potential (market rents) for the buyer. Other advantages could be the ability to redevelop the property much easier.

Exit the Rental Market

Owners may want to exit the rental market for two main reasons: (1) to owner occupy or (2) to take all units off the rental market to not rent them anymore (Ellis Act). Both routes do have strings attached, including minimum durations the unit or property has to stay off the market, filing fees, legal fees to draft all the correct notices and filings, and potential rights of first refusal to re-rent for the outgoing tenants. Prior to diving into that, owners approach tenants to reach buyout agreements because it provides flexibility in what the owner can later do with the property. Additionally, owners may be able to get the property vacant faster. Lastly, buyout agreements increase the chances tenants actually do move out, as tenants are usually given more money or longer move out periods, avoiding the need to file an eviction to force the move out.

There are advantages to incentivizing tenants to move out. A voluntary move out agreement at its core is mutually agreed upon by owners and tenants. Actively engaging in meaningful negotiations with tenants fosters cooperation and increases the success of a buyout being entered into and honored.

The information in this post is for general information purposes only. Nothing on this post should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.