When a landlord wants to remove a bad tenant, their options are limited. They can initiate eviction proceedings, which can take weeks and cost thousands of dollars in legal fees—and potentially thousands more in property damage inflicted by the angry tenant.

While a landlord may be justified in doing this, a more pragmatic option might be to give the tenant a lump sum of cash to move out by a certain date and leave the property in good condition. In a nutshell, this is a cash for keys agreement.

It may seem counterintuitive to pay a bad tenant to leave, but in many cases, it could be the best option for both parties.

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Both the landlord and tenant can avoid the stress and expense of a drawn-out eviction process. The tenant gets an injection of cash to help them move and find a new place to live. The landlord gets control of the property faster than they would with an eviction order, and at a much lower cost. A tenant who signs a cash for keys agreement is also incentivized to leave the property in good shape.

Cash for keys agreements are also used by mortgage lenders to help homeowners avoid foreclosure. Eviction proceedings can take several weeks, but foreclosures can drag on for months or even years. A cash for keys arrangements can get a landlord out of a bad situation quickly and cleanly.

Cash for keys is essentially an out-of-court settlement; it is legal in all 50 states.

That said, different states and jurisdictions may have rules about who can sign a cash for keys agreement on behalf of an owner; most require the owner to have legal cause for eviction.

Generally, if the owner has grounds for eviction or foreclosure, they can offer a cash for keys agreement to their tenant. In some states, the landlord may need to work with a licensed real estate agent to secure a cash for keys agreement with a tenant. The rules for lenders and landlords may be somewhat different, so it’s important to check your state laws before proceeding with cash for keys.

While the exact process may be slightly different in each jurisdiction, the basic steps look something like this:

• The landlord should ensure they have legal grounds for initiating eviction or foreclosure
• A notice of intent can be sent to the tenant or borrower to evict or foreclose
• The landlord or lender should follow up and communicate that they’re willing to negotiate an alternative
• A cash for keys agreement can be sent specifying the amount and method of payment and the date and process for turning over the keys

It’s important that a cash for keys agreement includes language specifying that the tenant waives their right to trial and is voluntarily giving up the property by signing. In the unlikely event that the tenant signs the agreement and refuses to move out, the landlord can quickly get a writ of possession.

It’s a good idea to have an attorney review or draft a cash for keys agreement to make sure it complies with state and local law and protects the landlord if the tenant acts in bad faith.

That depends on the cost of eviction in a given state or market. According to TransUnion, the average total cost of eviction runs between $3,500 and $10,000 depending on where the property is located. This includes court costs, attorney fees, lost rent, property turnover, property damage, and locksmith fees.

The cash payment should be less than the expected cost of eviction but enough to compel a tenant to voluntarily vacate. Some real estate investors recommend opening the negotiation by asking the tenants how much they would need to move; as it may be less than what the landlord is willing to offer.

A review of real estate investor forums about cash for keys agreements suggests that most offers are in the range of $500 to $5,000, with the high-dollar agreements in jurisdictions with strong tenant protections and expensive real estate markets (California and New York for example).

Cash for keys agreements are helpful in a variety of situations. Obviously, it’s a viable option whenever a tenant or borrower becomes delinquent as a way to avoid more expensive legal actions. But there are other circumstances when investors can use cash for keys to resolve an undesirable situation:

• Squatters: Vacant homes attract squatters; unfortunately, even these unlawful “tenants” must be removed through an eviction proceeding. A version of cash for keys may be a cheaper and more effective way to handle squatters.
• Existing tenants, new owner: Sometimes, an investor may need to remove the tenants from a property after they acquire it, even if there are no legal grounds for eviction. Offering a cash for keys agreement may accomplish your goal (talk to a local attorney to see what the law allows).
• Owners or tenants in REOs: Removing the owners or tenants with a cash for keys agreement makes the property easier to show and sell.

Things to remember when using a cash for keys agreement

No matter how anxious a real estate investor may be to get a tenant out of their property, it’s important to respect their tenant’s legal rights. It’s against the law to threaten or harass tenants, change the locks, turn off utilities, or forcibly remove them. If negotiations fail, the proper eviction process needs to be followed.

Finally, the security deposit is separate from a cash for keys agreement. The deposit still needs to processed according to the lease agreement. In other words, even if a landlord negotiates a cash for keys agreement, they may have to refund some or all of the security deposit if the tenant would otherwise be entitled to it in the absence of a cash for keys agreement.