The Cash for Keys Strategy
A Successful Alternative for a Return to Positive ROI
By The End 2 End Team
Return on Investment (ROI) is the most crucial aspect of owning a single-family rental property. You have put in the investment to purchase the asset, complete renovations and prepare the property for the rental market. Finally, everything is complete, and you are ready to begin seeing the ROI that you expected when you purchased this asset. You diligently market the property and screen potential renters to find the most qualified candidate to secure your investment. It is time to finally see some revenue…. what could go wrong?
Owning an investment or rental property can have its advantages and challenges. One of the biggest challenges investors face today is non-paying tenants occupying their rental properties. No matter how much effort you put into screening your tenants there is always the chance that the tenant will be late or stop paying.
So, what do you do when you have a tenant who Is habitually late or just stops paying altogether? Your return on investment has just plummeted. Your holding, maintenance and utility costs continue to pile up and your tenant has stopped responding to your inquiries as to when payment will be made. Eviction timelines can take months in some jurisdictions and even if you are able to secure an eviction date with the courts and local sheriff, the cost to complete the eviction can be in the thousands of dollars. At this point, you will be lucky if the tenant has not vindictively destroyed your property just for the sheer fact that you proceeded to evict them. Now you have even more renovation costs to incur to get the property turned and ready for rent.
This is a time to resort to some alternative resolution strategies to get back possession of your property quickly and in the best condition possible. One of these alternatives is called cash for keys or relocation assistance. In this scenario, you offer the tenant a specified number of dollars to vacate the premises and leave it in broom-clean condition.
This type of transaction results in the tenant leaving amicably and ensures that you will receive the property back in a condition ready to be turned and made ready for rental.
Why Pay Someone Who Owes Me Money?
The reality is that paying out a few thousand dollars to get possession of your property now and get it back to being income producing, is a much better and more cost-effective solution than shelling out tens of thousands of dollars to wait and proceed to evict the non-paying tenant.
Offer Determination
When determining the amount you would offer an occupant in this type of situation, we suggest considering the amount of rent they currently pay as well as the amount they would need to pay to secure another rental. For most people to move, they need to pay at minimum the first month’s rent and security deposit. If the tenants did not have the money to pay you for the rent owed, the likelihood of them having funds to relocate on their own is minimal at best.
Transaction Success
The success of your transaction is going to depend on the offer you present and the diligence of your efforts to get the tenant to communicate and be interested in completing the program. Historically, the average success rate is about 30%. In recent months, the End to End Solutions team has been exploring additional communication methods, offer amounts, and additional offerings that in some scenarios have resulted in a 70% or more success rate in either getting the tenant to accept the offer and relocate, or to bring their account current and continue their current tenancy.
Communication Methods
How you communicate the offer to your tenants is the most important aspect of your transaction. There are a lot of scams and fraud going on these days, and ineffective communication can lead your tenant to believe that what is being offered is not legitimate and therefore not take it seriously.
The offer should be presented to the tenant with a note or letter explaining why it is being offered. Communication attempts can include personal hand delivery of the letter, sending the letter to them via expedited delivery methods such as FedEx, UPS, or USPS, sending the letter and information via email, and following up with the tenant post-delivery via telephone to confirm receipt and discuss the offer terms.
Additional Incentives
Additional incentives can include the return of the security deposit (if the property is left in the same condition when rented), a waiver of the past due amount, and an agreement not to release this information to the reporting credit bureaus. These types of alternate add-on incentives can help to drastically increase your success rate and help in ensuring the property is returned to you in good condition.
Deadlines
When presenting an offer to your tenant, it is imperative that you impose deadlines for a response or acceptance of the offer as well as the vacate date. Setting a deadline for the tenant to respond or accept the offer will prompt them to make a decision in a timely manner.
Failure to provide deadlines can result in an open-ended offer that the tenant will attempt to renegotiate or delay as there is no repercussion for failure to act. It can also be beneficial to present multiple offers with different deadlines. For instance, if the tenant vacates the property in two weeks, they will receive a higher dollar amount than if they vacate the property in three weeks. Presenting the tenant with options gives them a little more sense of control of the situation and allows them to choose what option is best for their situation.
These unique and creative solutions allow you to effectively decrease the losses typically seen when a property becomes non-income producing and help increase your Return on Investment. The End to End Solutions team is constantly creating, testing, and producing these unique and innovative solutions for all of your real estate needs.
