Last week, the Los Angeles City Controller’s Office released data on the number of ‘Cash-for-Keys’ (or Tenant Buyout) agreements which have been filed with the City of Los Angeles from the years of 2019 – 2023. Buyout offers — also known as “Cash for Keys” agreements— have become a frequently used tool for landlords hoping to get tenants to leave rent-controlled apartments without going through a formal eviction process, which can take time, be costly and is governed by strict rules.
Below is a breakdown of the data released by the City of Los Angeles:
But First – Why “Cash for Keys”?
- Critical to the Value-Add Model: Tenant Buyouts are nothing new to the LA Multifamily landscape. If you have ever viewed a broker offering memorandum which lines up ‘Current’ rents vs. ‘Pro Forma’ rents, you would probably know that it is difficult to achieve “Pro Forma” rents without some strategy that resembles Cash-for-Keys. Said differently, if you are waiting for lower paying tenants to vacate their units on their own volition, you will realize that many of these tenancies will outlive you.
- The Thought Process: Freeing up these units from their old tenancies allows investors to renovate and reposition them to achieve at or above market rents, thereby significantly increasing returns and in turn the overall value of the property. If an investor spends $25,000 on a tenant buyout to remodel a unit and subsequently rents it out at a higher market rent, the return on cost and ultimately the value created for the property can be significant.
The Numbers
- Total Cash-for-Keys Agreements: Over the last four years, 4,869 tenant buyout agreements were filed in Los Angeles.
- Average Buyout Amount: The average buyout amount was reported at approximately $24,704.
- Buyout Hotspots Around Los Angeles by Zip Code: Notable areas with the highest number of tenant buyouts include 90004 Koreatown/Mid-Wilshire (370), 90026 Echo Park (250), 90019 Mid-Wilshire (228), 90006 Koreatown/Pico-Union (198), and 90016 West Adams (163).
- Highest and Lowest: 227 Tenant Buyouts were less than $5,000. 35 Tenant Buyouts were more than $100,000. 1,218 Tenant Buyouts were in the range of $20,000 – $25,000.
# of Buyouts Trending Down
- Market Dynamics at Play: Through the 4-year span there was a noticeable downward trend as far as sheer number of buyouts are concerned. In the 2019 year, roughly 1,200 Buyouts were recorded with the city compared to 789 buyouts in 2023. As LA Multifamily transaction volume declined 60%+ in 2023, it would be hard to ignore overall market dynamics when viewing this data. It is also important to note that many Cash-for-Keys agreements go unrecorded and are not reported to the City.
- Buyouts Get Harder as LA Rents Have Surged: While $25,000 may seem like a significant sum to most tenants paying below-market rents, many are savvy enough to realize that in today’s rental market, this sum will not get them very far – thereby making the process more difficult and costly for investors.
Click Here to View the Data Released by The City of Los Angeles
