Navigating Tenant Buyout Agreements: A Guide for Landlords
Making the “Life Changing” Offer to Your Tenant
By Sasha Struthers, Esq., Struthers Legal APC
Top Three Key Points
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Life-Changing Offer: Tenant buyout agreements, or "cash for keys" arrangements, are significant and can be life-changing for tenants. These agreements involve offering tenants money to vacate their rental units, which can be a shocking and difficult decision for long-term tenants who are attached to their homes and communities.
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Transparency and Empathy: When presenting a buyout offer, it is crucial to be transparent and empathetic. Clear communication about the business reasons behind the offer and understanding the tenant's perspective can facilitate a smoother negotiation process. This approach helps maintain trust and respect between landlords and tenants.
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Creative Solutions: Buyout agreements often require creative solutions to address the needs and concerns of tenants. Offering assistance with moving, providing contacts for credit specialists and mortgage brokers, or even offering alternative housing options can make the buyout offer more attractive and feasible for tenants.
Making the “Life Changing” Offer to Your Tenant
By Sasha Struthers, Esq., Struthers Legal APC
During a recent client consultation, the conversation took a very interesting turn into the "humane" aspect of tenant buyout agreements. I give almost every client or potential client the same remark about tenant buyout agreements: "it is a business decision to you, and a life-changing decision to a tenant." That is true with most “cash for keys” arrangements, especially when you have low, well below market rent and major income “upside” exists for a landlord.
Here are four different aspects of the “cash for keys” dynamic, or also known as tenant buyout agreements, that you, as a landlord need to put on to better understand the dynamic.
Life-Changing Offer
Life-changing is subjective. Winning $1.0 Billion in the lottery is a drastically different life change than being offered $25,000 to move out of your apartment, for example. However, being offered a tenant buyout in some ways is like getting a random winning lottery ticket with a catch…you get this amount, but then you also need to move out of your apartment.
Most people who have lived in their apartments for 10+ years may not think about moving from their apartment ever. I have come across scenarios where tenants had planned to live in their apartment forever. To now, one day, be asked about taking money in exchange for moving can be very shocking. Landlords are almost as shocked when they learn that their tenant is shocked or caught off guard by a buyout offer. This is where that line "it’s a business decision to you..." comes into play.
Some tenants grow attached to their rental unit and neighborhood. Packing up and moving from an apartment or rental unit and into a different one, maybe even into a new neighborhood, is for some a major adjustment that many tenants are willing to make, but it may take them time to come around to the idea. Prior to being offered the buyout, the tenants may have not considered moving and never searched for rental units. Had they previously considered relocating and searched for suitable rental units, they may have discovered moving may involve paying higher rent, and that while rents are higher, most of the available rental units come remodeled with newer or more amenities.
It is not always an easy, quick decision for a tenant. It takes patience and understanding. Sometimes it is a long-term play, but the idea is planted when the offer is made. It sometimes just takes time to take hold in the mind of a tenant.
Transparency
I don't sugar coat or beat around the bush when making a buyout offer to a tenant. Very often, I get a series of common questions posed by tenants: "Why me?" "I'm a good tenant, why do they want me out?"…etc. I then respond very plainly: "This is a business decision for my client and has nothing to do with “you” tenant as a person." It is not about "this tenant is bad,” but often it is about this unit is older and/or the rent is too low. While habitable, the unit could use some updating. In exchange for paying the tenant to move out and the cost of remodeling and upgrading, the landlord will get market rent.
This is done all over as one way to preserve rent-controlled units. If the landlord can get market rent, they will invest money into the property and the units to modernize and make them look nicer and they won't look to alternative means for generating cash flow, such as selling their building to a developer who may demolish the property and redevelop it into luxury units or condominiums. If the property gets redeveloped tenants will have to move anyway. Those newly constructed units may then be exempt from rent control.
This also helps keep rent-controlled properties owned by “moms and pops,” and even keep them in the family of many property owners. Tenants will likely move into a newly remodeled unit in which this scenario was already done. The way I see it, this is a way to maintain and keep alive existing rent-controlled housing stock, and preserve architecture that is fading away all the time.
It All Has to Make Sense
I've talked about this on the YouTube videos I produce about tenant buyout agreements. A buyout has to make sense to both parties. As an attorney who has attended many mediations and settled many cases, I know there is an ultimate buyout number that makes sense to both parties. You may not love that number (tenant wanted more and landlord wanted to pay less), but it ultimately gets the deal done. For the landlord, there is upside, especially for a unit that has remarkably below-market rent.
A buyout number has to still make sense to a landlord for a number of reasons such as: (i) the landlord has to have the money on hand to pay, (ii) the market rent has to justify the cost of paying the tenant to move and the cost of remodeling the unit, and (iii) the breakeven point could be years down the line but could immediately add equity value.
A buyout number has to also make sense to a tenant for a number of reasons such as: (i) if they stay locally, the market rent is going to be higher, (ii) flip side, the higher market rent may be tied to a new unit or more amenities so they are getting more for the higher rent, and (iii) they may have plans to locate out of town or state but they don't have the move-out money without a buyout.
A buyout number must make sense accounting for the factors specific to each side. It can't be too low that the tenant is not getting a fair price for their agreement to move. It can't be so high that a landlord cannot afford it or the return on the buyout investment is less than the buyout.
Solutions Oriented
Sometimes a buyout takes some creativity. Recently I spoke with Shiva Bhaskar, Esq. of LME Investments (he has a great weekly newsletter on the latest apartment trades and developments in Los Angeles) and he was telling me about the number of tenants they have helped buy homes with the proceeds received from a buyout agreement. When presenting a buyout offer they also shared contacts, such as a credit specialist to clean up the tenant’s credit, and mortgage brokers to get tenants pre-approved. There are also first-time homebuyer assistance programs. The buyout money truly helped some tenants with a down payment. Now, instead of paying their landlord's mortgage they are paying their own mortgage!
Another option, if you have new developments or contacts for new developments that have low-income units, the tenants can potentially apply for those units. This creates the possibility they have a place to go to that is affordable, especially if the tenant is low income. Some clients even offer tenants a newly remodeled unit in the same property or in another apartment they own or manage with a move-in special or slightly discounted rate. By presenting options or solutions to their move it re-frames the situation from something that they have to solve (finding a place) to an opportunity for them.
In every negotiation, it is worthwhile to put yourself in the other person's shoes. Buyout agreements require some touch of humanity and a good deal of empathy. Both of these important traits are very often possessed by “moms and pops” or small portfolio landlords.
If you are interested in learning more about tenant buyout agreements and wish to have a one-on-one session to go over your specific situation, you can sign up for a consultation with Sasha. Sasha Struthers is a California licensed Attorney and Real Estate Broker with a law practice that focuses on 'Cash for Keys'/ tenant buyouts and government agency complaints such as REAP, CRD, and Orders to Comply. Sasha's experience managing a 15-building real estate portfolio, including five apartments subject to LARSO has allowed her to help landlords strategically reposition their portfolios, maximize income, and reduce management stress. You can check out her law practice at www.struthers.legal.