Cash-for-Keys Buyouts: What You Need to Know

You have been approached by the landlord with a cash offer to vacate your apartment. It is called a buyout. Should you take it? Is it a fair offer? Do you have leverage to negotiate a better offer? We urge you to know your rights before you take the cash. A rent-stabilized tenancy in Beverly Hills is worth more than you think. So let’s talk about the buyout and your options when the landlord comes calling with cash in hand.

What is a Buyout?

A buyout is a voluntary private agreement between the tenant and landlord in which the landlord pays the tenant cash or other consideration to voluntarily vacate the apartment. Compensation can include money or ‘free rent’ or some other consideration. The terms of a buyout can be whatever the tenant and landlord agree on. For example the tenant can negotiate for money plus a no-questions refund of the security deposit and a favorable letter of recommendation too.

Voluntary means voluntary: an agreement should not be the product of undue pressure or coerced by the landlord. Living conditions that appear intended to make continued occupancy unpleasant or untenable is called ‘constructive eviction.’ Please get in touch with Renters Alliance if a landlord resorts to pressure, harassment or conditions intended to force you out.

A buyout is not the same as a tenancy termination (i.e., eviction). In Beverly Hills a rent-stabilized tenancy can be ended due to no fault of the tenant but for only one of five reasons as specified in our rent stabilization ordinance below. Regardless of the reason, eviction obligates the payment of a relocation fee and other requirements like a long notice period may apply too.

A voluntary vacancy, on the other hand, relieves the landlord of the other requirements. In a buyout the relocation fee requirement goes away too. This discussion is limited to rent-stabilized housing in Beverly Hills. Condominium and single-family units are exempt from rent stabilization here, though other tenants may have protections under the Tenant Protection Act (AB 1482) which is state rent control.

Why Would the Landlord Offer Me a Buyout?

There are two general circumstances in which a landlord will offer to buy out a tenant: 1) the landlord can terminate the tenancy under the law for a permissible reason under our rent stabilization ordinance even though the tenant bears no fault; or 2) the landlord cannot terminate the tenancy because the reason for needing vacant units does not meet one of the permissible reasons for termination.

In the former circumstance a buyout may be a more expedient option than termination. In the latter circumstance the landlord has no option but to buy-out the tenancy; the tenant can’t be lawfully evicted. Let’s look at these in more detail because it is important to understand the difference to infer the landlord’s motivation for offering a buyout.

If lawful termination is an option…

The Beverly Hills rent stabilization ordinance allows a landlord to evict tenants due to no fault of the tenant but only for five reasons:

1. Use of the unit by the landlord to house the landlord’s spouse, children, or parents;
2. Changing the resident building manager;
3. Converting the property in its entirety to condominiums or other common-interest development;
4. Remodeling two or more units; and,
5. Permanently withdrawing the property from the rental market for redevelopment (aka Ellis Act).

These processes are detailed in sections 4–6–6 of Chapter 6 and 4–5–501 of Chapter 5 of the rent stabilization ordinance. Most tenants fall under Chapter 6.

Aside from those reasons, there is no other ground for evicting a rent-stabilized tenant in Beverly Hills.  Moreover, terminating a tenancy for any of the above reasons comes with restrictions that the landlord wants to avoid. Let’s look at a few examples where such restrictions make the buyout more attractive option than termination.

• The landlord evicts a tenant to provide the apartment to a family member (ordinance subsection 4–6–6(H)). However there are conditions! Only the landlord, the landlord’s spouse, children or parents can move-in and they must move-in within 30 days and live there for at least one year. Also the landlord is limited in which household can be evicted: senior and disabled occupant households get preference over newer occupancies. The displaced tenant gets 90 days notice and a relocation fee — however if a ‘comparable’ vacancy arises within that 90-day noticing period the tenant can request to live in that unit.
• The landlord evicts all tenants to convert the property to condominiums (ordinance subsection 4–6–6(J)). However there are conditions! The landlord must provide 90 days notice to tenants and pay a relocation fee. The landlord must file all necessary applications and pay all fees and have approvals or permits in hand before providing that notice. Work must commence within 60 days after terminating the tenancies. And if the units are instead re-rented they are again rent-stabilized.
• The landlord evicts two or more households for ‘major remodeling’ (ordinance subsection 4–6–6(K)). However there are conditions! Each household must get a minimum of one year’s notice and a relocation fee. The tenant can instead request to be relocated to a comparable unit in the building, if available, and after remodeling move back to the remodeled unit at the landlord’s expense though at a higher rent established by the city. Even if the terminated tenant moves away she still has the right to move back. All remodeling must be completed within one year after a permit is issued.

To sum up, when the landlord terminates tenancies in order to remodel and reposition the property, convert it to condominiums, or even redevelop the property, the landlord has obligations to tenants. Time is money in real estate so the buyout is an expedient option. Indeed the expense of a buyout is a mere rounding error given the size of the residential projects we will see in coming years.

If lawful termination is not an option….

Except for those five reasons enumerated in the rent stabilization ordinance, a landlord in Beverly Hills cannot evict a rent-stabilized tenant unless the tenant is at fault. That makes the buyout the landlord’s only option in circumstances such as these:

• The landlord wants to be rid of a thorn in the landlord’s side. With no reason to lawfully evict a troublesome tenant the landlord resorts to cash payment to persuade the tenant move on.
• The landlord wants to be rid of a tenant who has fallen behind on rent during the pandemic. Tenants can’t be evicted due to the moratorium on eviction for nonpayment, so the landlord’s only option is to offer a buyout (perhaps forgiving some rent) in order to find a paying tenant.
• The landlord must make major repairs that affect habitability. Landlords too often delay repairs for water damage and the consequent mold growth makes that job much more invasive. Tenants will have to be temporarily relocated at the landlord’s expense pursuant to the city’s Means and Method Plan requirement. Instead a cash payment in lieu of relocation may be more cost-effective for the landlord.
• The landlord has in mind a higher-and-better use for the property and the plan doesn’t include current tenants. Perhaps the property will be sold; real estate listings suggest it is more valuable empty than tenanted. Or a buyer overpays knowing he has to maximize tomorrow’s rental income to cover the nut. Either way the property is more valuable untenanted and the buyout is an expedient means to that end.

An educated tenant is an empowered tenant! When the landlord comes calling with talk of a buyout it is important we know the landlord’s options — and motivation — before we talk terms. Tenant leverage means appreciating the upside of the landlord’s potential deal and estimating how much the landlord may be willing to pay for time and certainty.

My Landlord Sold the Property: What’s Next?

A landlord usually sniffs around for a buyout when the property has changed hands. But a property sale need not mean disruption for tenants. Management may change and tenants could see new rules for the payment of rent and the like. But undertakings like remodeling or redevelopment take time. It is not uncommon for a full year to pass without anything happening.

On the other hand, property transfers are up this year (despite the pandemic) as 63 properties have changed hands or been reorganized as LLCs from January through October. That’s double the five-year average of 30 each year during the same period. So the residential real estate market is more active and we are likely to hear more about buyouts. We welcome any questions about your situation after a sale. Please get in touch with Renters Alliance.

How Much Leverage Do I Have in a Buyout?

Today Beverly Hills tenants have more leverage than ever to negotiate a favorable buyout. First, the residential real estate market is heating up. Industry reports are bullish. Investment money is chasing returns in real estate. Sales are up.

Second, new state laws have removed some local development restrictions. For context, Beverly Hills has added relatively little multifamily housing compared with our municipal neighbors. That’s because land costs are sky-high here but also because local restrictions on height and density have discouraged development. Sacramento has put the thumb on the side of developers and that is injecting new energy into redevelopment.

Third and perhaps most important, the state and local moratoriums have effectively pressed the pause button on evictions. Landlords in Beverly Hills can’t evict for nonpayment of rent or for no-fault, which includes all of the reasons we cited above. If the the wants a vacancy the buyout may be his only option…and that means greater leverage for tenants.

This represents a change and it may not last forever. Once the moratorium expires (City Council recently extended to April 1, 2022) then no-fault evictions can again proceed. Some tenant leverage will have dissipated. That added measure of security against eviction will have evaporated too.

Today tenants are better-advantaged to demand what their tenancy is actually worth. Let’s look at some numbers!

How Much is My Tenancy Worth?

This is the key question, isn’t it? We suggest two questions that every tenant should ask when considering a buyout:

1. What is my tenancy is worth to me?
2. What is my tenancy worth to my landlord?

This section tries to put numbers to those questions however with a big caveat: a tenancy has no objective value. Rather it is a function of actual costs, opportunity costs, and how the landlord values the upside in a voluntary vacancy.

What the buyout costs a tenant

Some costs of letting go of our home we can quantify: the movers, utilities, and perhaps time off from work that is part of moving house. Those are one-time costs and we know how to budget them. But tenants are less likely to consider the additional monthly expense of the replacement housing. That expense adds up so let’s look at some numbers.

Most tenants will pay a higher rent for replacement housing. How much higher? To find out we turned to a recent report from the rent stabilization division. It provides average rents for existing tenancies and it groups those rents by unit bedroom count and household move-in date. Here’s what the data looks like in the report.

The rental unit registry data allows us to compare what a hypothetical household pays today, on average, for an apartment of a certain size and what it would pay were it to relocate to a comparably-sized apartment (the 2021 rent). That difference is the additional monthly cost of replacement housing after taking a buyout.

First we took average rent data for each households size. Then we calculated the difference between the current rent and the higher rent for a comparable apartment today. Finally we took that additional monthly expense and multiplied it by 42 (months) to show the additional cost that would be paid by the average household in that sized apartment.

(We use 42 months because that is how the federal Department of Housing and Urban Development calculates a relocation fee for a terminated tenancy. The relocation fee is supposed to compensate tenants for the additional monthly cost they will incur for having to move house.)

Next we choose three hypothetical scenarios to reflect a variety of tenant circumstances:

• Studio occupant who moved in within the last five years;
• 1-bedroom household that moved in between 6 and 10 years ago;
• 2-bedroom household that moved in 11–15 years ago; and,
• 3-bedroom household that moved in 15–20 years ago.

From the following table we can see that two factors affect the additional monthly housing expense: 1) Bedroom count because higher rents mean a greater monthly dollar difference between current and replacement housing cost; and 2) Tenure of tenancy because longtime tenants tend to pay below-market rent and that means a larger difference between the current rent and the replacement housing rent.

As calculated from actual average rents in Beverly Hills our findings show:

• A household that occupied a studio apartment since 2016 would pay $5,628 more over the three years for a studio apartment leased today;
• A 1-bedroom household that leaves an apartment it has occupied for 6 to 10 years would pay $15,003 more over three years;
• A 2-bedroom household that leaves an apartment it has occupied for 11 to 15 years will pay $27,006 more; and,
• A 3-bedroom household that leaves an apartment it has occupied for 15–20 years will pay $25,914 more on average for 3-bedroom replacement housing leased today.

The additional monthly rent for replacement housing will be the single largest expense many tenants will face after taking a buyout. Because rent is the largest single item in most households’ budget, the expense must be taken into account and factored into a tenant’s consideration of a proposed buyout.

To sum up, we have actual costs (like movers and the additional monthly expense for replacement housing) and unquantifiable costs like stress and disrupted relationships with friends and neighbors. Together these begin to suggest the real cost of a buyout. And that is one way to put a price on our tenancy!

What the landlord is willing to pay

There is another way to put a price on our tenancy: to know the price that the landlord may be willing to pay for a vacancy. Unfortunately Beverly Hills does not regulate buyouts. Wouldn’t it be great to have those figures? Fortunately Santa Monica does regulate buyouts and even posts the actual buyout amounts online as a public service.

We analyzed buyouts from Santa Monica for fiscal years 2016 through 2021 and came away with some findings:

• Tenants in Santa Monica accepted 294 buyouts over a five-year period. Those buyouts ranged from $500 to $449,000. That is a really wide range for payouts!
• The median value of buyouts over the five-year period was $30,000. (The median represents the middle of the range so half of the buyouts were valued more and half were valued less.)
• The average buyout was $33,359 (excluding statistical outliers). The average is greater than the median value because some larger payouts pulled the average higher.
• About 40% of all buyouts were for an amount greater than any applicable relocation fee, which in Santa Monica ranges from $16,650 to $33,950.
• Some buyouts were worth much more to the landlord, like the studio vacancy for which a landlord paid $100,000 and the 3-bedroom vacancy that fetched nearly half a million dollars.

We excluded statistical outliers from our analysis but we do note them in this table of top-line findings.

Another finding is that buyout values tend to increase with bedroom count, as this next table shows, however the relationship between bedroom count and buyout amount is not consistent. We see instances where more bedrooms meant a higher payout but other instances where larger apartments showed smaller payouts relative to neighbors at the property. There are also properties that show the same payout for all vacancies regardless of bedroom count. Clearly there are other factors at play!

What are those other factors that affect the buyout value? We can’t say because we don’t have access to the agreements.

Our next task is to find relevance in the data. However the ultra-wide range of values for all buyouts, and for buyouts within each apartment size category, makes that a challenge. We have medians and averages but that only tells us so much. To learn more we wanted to look at frequency distribution and interquartile ranges. Fasten your seat belt!

Here we are trying to drill-down to the most relevant buyout values: the prices that landlords were more likely to pay in exchange for a voluntary vacancy. We need to exclude more of the outlying values.

Our first step was to exclude statistical outliers (the three highest values as it happens) to leave us with a range of values from $500 and $150,000. The next step was to divide that range into ten equal bins by value. Then we can count the number of buyouts that fell into each bin for the frequency distribution.

The chart shows that the great majority of buyouts (85% of the total in fact) were less than or equal to $60,000. For us that is the most relevant range of values. Landlords were much more likely to pay $60,000 or less to buy-out a tenancy in Santa Monica and that likely holds true for Beverly Hills too.

Another thing to note is that 53 of 295 buyouts (18%) were valued at $15,000 or less. That is less than the smallest Santa Monica relocation fee ($16,560).

Why would any tenant accept a buyout valued at less than the relocation fee? We can only speculate, but most likely those tenants were not due a fee.

Perhaps the landlord was not formally terminating their tenancy; or the landlord was able to hoodwink a fee-eligible tenant to take a smaller amount. It is also plausible that landlords found a pretext to evict (for-cause) and then pressured the tenant to vacate voluntarily with a small buyout. (A representative from the Santa Monica Rent Stabilization Board had no ready answer.)

Frankly we are grasping at straws to make sense of these lower buyout values. We do know that Santa Monica tenants know about the relocation fee because the city requires the tenant to receive a Buyout Notice. The notice makes clear that the relocation fee is a floor and not a ceiling. “The relocation fee amounts are provided for information only and in no way limit the buyout amounts landlords and tenants can agree upon.”

At the other end of the distribution, about one-third of all buyouts were for amounts greater than the highest Santa Monica relocation fee ($33,950). That suggests that those tenants had leverage to demand a payout higher than the fee. This is an assumption. Our mileage may vary in Beverly Hills because our relocation fees top out at only $16,000. That’s not quite the same leverage as a $30k+ fee!

A closer look at buyout values by apartment size

Tenants looking to put a price on their own tenancy are likely to look at the buyout values for a similarly-sized unit in Santa Monica. We want to go beyond the top-line median and average values. So we broke out the buyout data by bedroom count to find the relevant range in each size category.

That meant bracketing out larger and smaller values to really narrow the focus to the middle values. The ‘interquartile range’ is a useful means of finding that middle-values range. First we identify (four) quartiles and then eliminate the first and fourth quartiles look only at the second and third quartiles. These are by definition the middle values in a range.

Once we calculated the interquartile range we could find the interquartile mean, which is the average value in each category. Then we charted the range and average for each bedroom-count category. This helps us visualize the spread of buyouts in each category.

We can see that buyouts generally do increase with bedroom count. However 3-bedroom households agreed to buyouts that were not appreciably more valuable on average than 2-bedroom buyouts. Indeed the difference between the average values in these two categories is only a thousand bucks! One might expect a 3-bedroom vacancy to command a premium to the landlord.

Then there is the spread of values. This is really what is most relevant to a tenant evaluating a buyout offer and it differed by bedroom count too.

Studio buyouts showed a narrow spread: only $18,658 separated the lowest and highest studio buyout values in our analysis. That is the grey band. In this category the average (mean) buyout was $17,897 as indicated in red. The spread is relatively narrow and the average is relatively low in this category.

For 1-bedroom buyouts the spread was larger at $25,410. The average value is higher of course — $26,700 — but the average is also closer to the middle of the range. Unlike studio buyouts, values in the 1-bedroom category were more evenly distributed through the range. (Studio values tended to be lower in the range and that pulled the average down.)

For 2-bedroom buyouts the spread yawned wider still: $34,850. The average at $38,583 was also closer to the middle of the range. Both the spread and the average show that the 2-bedroom vacancy was evidently much more valuable to a landlord than either the studio or 1-bedroom vacancies.

The 3-bedroom category is something else though: the spread of buyouts was more narrow than for 2-bedroom units and the prices paid overall were lower. Some larger buyouts in this category pulled up the average to $39,647 — just a little higher than the 2-bedroom category.

Again, we excluded the upper and lower quartiles in this analysis in order to focus on the middle values that we think are the most relevant Santa Monica data and the ranges most applicable for most Beverly Hills tenants.

Conclusion: Tenants Have Leverage to Negotiate!

Knowledge about average values and buyout ranges should help us put a price on our own tenancy. With a caveat: we live in Beverly Hills. In Santa Monica certain conditions may support higher buyouts.

For one thing, Santa Monica regulates buyouts. There is a 30-day ‘cooling-off’ period before an agreement takes effect; the tenant can rescind the agreement during that period. Santa Monica also requires disclosure: tenants must be informed about their rights and that includes the amount of the relocation. Renters Alliance is pressing for the regulation of buyouts in Beverly Hills, too. (Read our comment to City Council.)

The significantly higher relocation fees in Santa Monica likely serves to put a high floor under the price negotiated for a buyout. The landlord would otherwise have to pay that fee, in some instances, so why would a tenant settle for less? We see the higher floor reflected in the higher buyouts for 2-bedrooms and 3-bedrooms households.

By any measure a Beverly Hills tenancy has value — and likely much more value than we think. Landlords know how to price it when the vacancy is in their interest. The tenant’s challenge is to price it properly too.

FAQ

• Must I accept a buyout offer? No! Buyouts are entirely voluntary. If a landlord is proposing a buyout it is because it advantages the landlord. It is up to a tenant to determine if it is to her advantage.
• Would my buyout be taxable? A buyout is considered taxable income. That may hold for forgiven rent too. Consult an accountant or tax expert for professional advice. Consider your tax liability when negotiating on price.
• Can a buyout be greater than the relocation fee? Yes, and in cases where the landlord can terminate the tenancy it certainly should be more than the fee. In such cases think of the fee as the floor — and a low floor at that. The landlord may be willing to pay 2x or 3x the relocation fee for the voluntary vacancy.
• Should I consult an attorney? That’s for you to decide. Buyouts are generally executed in plain language. We have reviewed some agreements and found them straightforward as to terms, payout, deadlines and such. When playing hardball (think of a holdout tenant) it will be helpful to consult an attorney experienced with negotiating buyouts.
• Besides price what other terms can be included? A buyout is a voluntary agreement and the terms can be whatever it is agreed. Once a price is agreed, we would pull out of our back pocket other asks like refund of the deposit in full and a letter of recommendation (which we could write).
• Once I sign, do I have any recourse? Only in the courts for misrepresentation, say. Buyouts are not regulated in Beverly Hills and so no local agency mandates a cooling-off period.
• Should I negotiate independently or in coordination with my neighbors? When the landlord comes calling with a buyout it is very wise to share that information with your neighbors. Talk over the terms that are on offer. Landlords prefer to divide and conquer, but in then end it is a personal decision: maintain solidarity or to take the offer that best serves your individual needs?
• Should I agree to a non-disclosure (NDA) clause? Again this is a personal decision. Landlords prefer to negotiate with tenants individually. The NDA keeps agreement terms from the tenants who continue to negotiate. You could try to negotiate the NDA clause out of the agreement before signing.
• What is the Ellis Act? State of California enacted the ‘Ellis Act’ in 1985 (Government Code Section 7060–7060.7) to allow residential landlords to exit the rental business. But prior to withdrawing the property from the market, the landlord must get permission from local agencies and then evict all tenants and pay a relocation fee. Landlords sometimes invoke Ellis to suggest that the buyout is the only alternative to termination. But landlords would much rather the tenant vacate voluntarily and they are generally willing to pay for it.
• What are the consequences if I don’t agree to a buyout? See the subsection titled, ‘If lawful termination is an option….’ If the landlord for his purposes can terminate the tenancy then usually it will be pursuant to the Ellis Act (see above) and the required noticing period is 120 days for most tenants and one year for senior occupants (62+ years) and disabled occupants. This provision gives relatively greater leverage to those qualified tenants than other tenants.
• Can the landlord serve me with 120 days notice to vacate but give my neighbor one year? If the landlord is evicting pursuant to the Ellis Act, then senior and disabled occupants are entitled to a year. The landlord is not obligated to provide any non-qualified tenant with that notice. Different rules will apply if the landlord terminates tenancies for another lawful reason.

Do you have a question that we haven’t addressed in this deep-dive on buyouts? Please get in touch with Renters Alliance and we’ll do our best to answer.

Resources

City of Santa Monica buyouts data webpage

Renters Alliance table of Santa Monica buyouts data for FY 2016–2021 (sorted by unit size)

Santa Monica buyout notice and Information packet 2021

Los Angeles RSO buyout disclosure notice

Beverly Hills rent stabilization ordinance Chapter 6 section 4–6–6 EVICTIONS (applicable to 95% of tenants)

Beverly Hills rent stabilization ordinance Chapter 5 section 4–5–501 EVICTIONS (applicable to 5% of tenants)

Los Angeles Tenants Union Buyout Calculator

AB 1482 Tenant Protection Act Fact Sheet