Latest / Own More Doors / #19 Master Negotiating Cash for Keys (Cody Charnell)

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#19 Master Negotiating Cash for Keys (Cody Charnell) · Own More Doors

0:00
SPEAKER_01: What's up everyone?
0:00
SPEAKER_01: Juan Weezar here with the Own More Doors podcast.
0:03
SPEAKER_01: This specific episode was first shared on our YouTube channel, Sage Real Estate.
0:08
SPEAKER_01: Check it out.
0:08
SPEAKER_01: And we're excited to bring it to you here.
0:11
SPEAKER_01: We hope you enjoy the interview.
0:13
SPEAKER_00: So three other buyers passed on this deal.
0:15
SPEAKER_00: My client ended up getting it, and because she knew how to negotiate cash for keys, she unlocked over$800,000 of equity on this single property.
0:25
SPEAKER_00: So watch this video to learn how cash for keys works.
0:28
SPEAKER_00: Hey everyone, I'm Juan Weezar with Sage Real Estate.
0:30
SPEAKER_00: And I'm Cody Charnell, investor and broker here with Sage Real Estate.
0:33
SPEAKER_01: We're super excited to have Cody on today.
0:36
SPEAKER_01: Cody is coming to our firm with tons of experience, years of experience, and he knows a lot.
0:42
SPEAKER_01: So make sure that you follow Cody on his YouTube channel that he's launching here soon.
0:47
SPEAKER_01: We'll put the link in the bio.
0:49
SPEAKER_01: If you enjoy my channel, you're going to enjoy following Cody's channel.
0:52
SPEAKER_01: So make sure to tune in.
0:53
SPEAKER_01: Now, today we're going to be talking about a really hot topic.
0:56
SPEAKER_01: If you're a buyer, if you're an investor, the one the one uh term you keep hearing is cash for keys.
1:05
SPEAKER_01: Cash for keys is this popular thing.
1:07
SPEAKER_01: Now, if you're outside of California, you might be wondering what that is.
1:11
SPEAKER_01: In California, we have certain laws that prevent us from giving someone a 60-day notice asking them to move.
1:20
SPEAKER_01: Now, before we even go there, you're going to wonder, well, why are you asking the tenants to move?
1:25
SPEAKER_01: Cody, why would a landlord want the tenant to move?
1:29
SPEAKER_00: Well, with multifamily property, the value really is derived from the rents that the property generates.
1:36
SPEAKER_00: And it's not an uncommon thing for a person to buy a building and get behind on rents, not issue rent increases every year.
1:43
SPEAKER_00: And then when they go to sell it, you know, their rents are really low.
1:47
SPEAKER_00: So that's a problem that either the new buyer is going to have to fix or they're going to have to fix if they want to get the most value for their property.
1:54
SPEAKER_01: So one thing that we hear at Sage Real Estate, we we talk to apartment owners all the time.
2:01
SPEAKER_01: And apartment owners come to the point where they've owned the building long enough and they're ready to retire or they're done with management.
2:08
SPEAKER_01: And they come to us and they're like, What's my property worth?
2:10
SPEAKER_01: Well, one of the first questions that Cody and I are going to ask that owner is, Well, what are the rents?
2:16
SPEAKER_01: And then they kind of keep their head down and they'll say, Well, I didn't do a good job of raising the rents through the time that I've owned it.
2:24
SPEAKER_01: They give us the rents, and due to those rents, we're going to come up with a certain value.
2:29
SPEAKER_01: And it's not that the property is not worth more, it's just that the rents are giving us a very low value versus much higher rents will give you a higher value.
2:39
SPEAKER_01: So I want you to understand this.
2:42
SPEAKER_01: When you're an apartment owner or a rental owner of a property, what you're really signing up for is for the income stream of that building.
2:51
SPEAKER_01: That's really what you're getting.
2:52
SPEAKER_01: So the higher the income stream, the higher the value.
2:56
SPEAKER_01: So oftentimes, oftentimes I know that landlords are criticized for being these big, rich, wealthy folks.
3:06
SPEAKER_01: And Cody and I work with these people all the time, and I can tell you that that couldn't be further from the truth.
3:11
SPEAKER_01: They're blue-collar people.
3:13
SPEAKER_01: Sometimes English is a second language.
3:15
SPEAKER_01: They were certainly tenants themselves at one point, and they had to buy units because this was a way for them to what?
3:22
SPEAKER_01: To someday retire, provide some passive income.
3:26
SPEAKER_01: And and they don't have pensions.
3:35
SPEAKER_01: And so they bought these properties with the intention of at some point the property's going to take care of me.
3:41
SPEAKER_01: But it doesn't start, it doesn't start off so great, does it?
3:46
SPEAKER_00: Not usually.
3:55
SPEAKER_00: So it's something that we have to work with our clients on constantly.
3:59
SPEAKER_00: And our topic today, you know, negotiating cash for keys is one of the biggest tools that we we recommend to people.
4:06
SPEAKER_01: So a lot of times when Cody and I analyze a property for a client, they're going to say a couple things.
4:11
SPEAKER_01: They're going to say, the property doesn't cash flow, the property doesn't pencil, or the property doesn't make sense, or I don't want to be negative.
4:19
SPEAKER_01: So these are the reasons why someone is not going to buy a property.
4:24
SPEAKER_01: Now here's one thing that it's critically important that I need you to take away from this video.
4:28
SPEAKER_01: The income of today is not the income of tomorrow.
4:31
SPEAKER_01: What does that mean?
4:33
SPEAKER_01: That means that the income that you're looking at that building's currently producing, that is at a snapshot of today, there are tactics to increase that rent.
4:43
SPEAKER_01: So the cash for keys is one of those, it's probably the fastest way to get you there.
4:49
SPEAKER_01: Now, before anybody watches this video and contacts us and criticizes us for making the cash for keys video, and how dare you show people how to do this, this is a the way that we're presenting it, the way that we follow cash for keys, it's truly a win-win.
5:05
SPEAKER_01: It's a win-win for the landlord, it's a win-win for the tenant.
5:08
SPEAKER_01: A lot of times tenants are in a situation where they were already thinking about moving, they've already saved up to buy their first house, and this this lump sum that is negotiated with the owner is just bonus, it's cherry on top.
5:22
SPEAKER_01: So we're gonna talk about the dues.
5:26
SPEAKER_01: Where should a, because this situation is gonna apply to two people.
5:30
SPEAKER_01: One, you're an owner with really low rents, and the value of that property is not acceptable to you.
5:37
SPEAKER_01: So you're someone who's gonna say, well, after talking to a company like us, you've realized, well, I need to get the rents higher or I need to get them vacant, because that's what buyers want.
5:49
SPEAKER_01: The buyers will typically want vacant units for the reason that they could set a what they would call a market rent.
5:55
SPEAKER_01: So what that means, a market rent means a much higher rent.
5:59
SPEAKER_01: So that's gonna be so the seller might be looking at the cash for keys option before listing with us.
6:05
SPEAKER_01: Two, we helped a buyer buy a property and the rents are so low that this property is losing money every single month.
6:13
SPEAKER_01: So now we need to come in and raise that rent.
6:16
SPEAKER_01: So, what are some common dues in negotiating cash for keys?
6:20
SPEAKER_00: I think the biggest one is be compassionate.
6:24
SPEAKER_00: So remember, you're you're asking someone to leave what's been their home for probably a couple years.
6:30
SPEAKER_00: Um they're in a situation where their rent is low.
6:33
SPEAKER_00: So you don't want to come at them combatively.
6:36
SPEAKER_00: You want it to be a win-win.
6:38
SPEAKER_00: So one other thing, a big do, is don't start too low on the amount that you offer.
6:44
SPEAKER_00: Make sure to keep in mind, you know, they're gonna have to put down a new deposit at a new rental property or at a new um unit that they're going to rent.
6:51
SPEAKER_00: There's gonna be moving expenses, so take that into consideration.
6:55
SPEAKER_00: One thing that we also like to do is offer to be a rental reference to help them get into that new uh apartment unit that they're gonna rent.
7:04
SPEAKER_01: So oftentimes people will contact us and say, hey, what's the what's the um magic trick to doing a successful cash for keys?
7:14
SPEAKER_01: And so let me just give you a couple scenarios.
7:16
SPEAKER_01: There's not one way to do it, there's not one form, there's not an attorney that you hire.
7:22
SPEAKER_01: It's when Cody's talking about being compassionate, I'm gonna just give you a scenario.
7:26
SPEAKER_01: Okay, I'm gonna play the role of the landlord.
7:28
SPEAKER_01: And the way that I would do it is if I'm a landlord of a building, whether I just bought it or I've owned it for a really long time, and if I have a good relationship with the tenants, meaning that they don't hate me, right?
7:39
SPEAKER_01: Because sometimes that's gonna happen.
7:40
SPEAKER_01: So if I have a good relationship with the tenant, then I could probably have an open discussion.
7:45
SPEAKER_01: I do not want to text, I don't want to send an email, I don't want to send a letter.
7:50
SPEAKER_01: I do want it in writing, but that first communication to me, it has to be in person.
7:55
SPEAKER_01: So I'm gonna give you a perfect example.
7:57
SPEAKER_01: I'm gonna go to someone's house.
7:59
SPEAKER_01: Hey Cody, how's it going?
8:02
SPEAKER_01: Um, I know you've been living here for 10 years.
8:05
SPEAKER_01: We've owned it for 20 years.
8:07
SPEAKER_01: I've appreciated having you as a tenant.
8:09
SPEAKER_01: I wanted to let you know that I'm thinking about retiring and I'm thinking about selling this building.
8:13
SPEAKER_01: Typically, what's gonna happen is someone's gonna buy the building and I really can't control what they do.
8:18
SPEAKER_01: So whether they ask you to move or what they're gonna do, I can't control that.
8:22
SPEAKER_01: So, with that being said, uh currently state law requires that that I could potentially offer you$4,500 to relocate so long as I meet um certain requirements in terms of renovating the unit.
8:37
SPEAKER_01: Um, but instead of offering you$4,500 to move and you don't have to sit here through the move uh the sales process, I'd like to offer you$6,000.
8:48
SPEAKER_01: So you let them think about it.
8:50
SPEAKER_01: You're not pushing the scenario on them, you're being compassionate, you're being genuine, and then in my back pocket, I'm like, think about it.
8:58
SPEAKER_01: Here's just a quick letter highlighting when you would uh be receiving the money, which is typically at the end of the of the process.
9:07
SPEAKER_01: Um what do you think of that approach?
9:11
SPEAKER_00: I really like it.
9:12
SPEAKER_00: I mean, you're offering them a way to exit the unit on their terms.
9:19
SPEAKER_00: You're offering more than what the government requires you to offer.
9:22
SPEAKER_00: So, really, it seems like a pretty big win for the tenant.
9:25
SPEAKER_00: I think I if I was a tenant, I would think, wow, this this landlord is taking care of me.
9:29
SPEAKER_01: And we've been doing this a very long time.
9:31
SPEAKER_01: And whether you're you're having to raise rents, I always like to do everything from an in-person approach.
9:39
SPEAKER_01: Okay.
9:40
SPEAKER_01: Now, if you have a property manager and if your manager, uh property manager is capable of having that discussion, if the property manager knows how to handle that situation, then you can leave it up to them.
9:50
SPEAKER_01: Now, let's get into part two, which is a do that we recommend.
9:53
SPEAKER_01: If you as the owner know that you're not the right person, there are uh negotiators.
10:00
SPEAKER_01: Like I don't want to call them, let's call them professional cash for keys negotiators.
10:05
SPEAKER_01: Okay, so tell us about what the service that they offer, if you as a landlord believe that you're probably not the best person to tackle that situation.
10:14
SPEAKER_00: Yeah, so actually I've used these people myself in the past, and what they do is they approach the tenant on your behalf and they have these conversations.
10:23
SPEAKER_00: Um, they've done this hundreds, if not thousands, of times, so they know what to say.
10:28
SPEAKER_00: Um, sometimes it's uh good to have an intermediary because when you're talking directly to the tenant, you know, it can be a little combative.
10:37
SPEAKER_00: They see you as the landlord, you're the one that's asking them to move.
10:40
SPEAKER_00: If you have a third party go in and say, hey, this is the situation, we have the landlord on this side and you on this side.
10:46
SPEAKER_00: Um, let me help it, help you guys come to an agreement to make this a win for everyone.
10:50
SPEAKER_00: Um, sometimes that can help a lot.
10:52
SPEAKER_00: So they these consultants, you can hire them to negotiate, you know, based on results.
11:00
SPEAKER_00: So you'll you'll pay a fee up front, and then if they're successful, you pay an additional fee on the back.
11:05
SPEAKER_00: So it's not like you're just paying the entire fee up front and hoping that they're gonna make this this work.
11:12
SPEAKER_00: It is really based on results.
11:14
SPEAKER_01: I we I was selling a building, the owner hired one of these negotiators uh off of my recommendation because I didn't think the owner was he was too emotional about the whole thing.
11:24
SPEAKER_01: And so I recommended that uh someone that they hire.
11:27
SPEAKER_01: And so let me just give you an example of fees.
11:29
SPEAKER_01: Do not quote these as it could change in a different situation.
11:32
SPEAKER_01: So this gal came out, uh, the owner gave her$1,000 to kind of open up the negotiations, and then upon completion, he gave her another$1,000.
11:41
SPEAKER_01: So he paid$2,000 uh to her and she negotiated the fees with the tenant, which was roughly in this scenario, like$5,000.
11:49
SPEAKER_01: And so his cost was$7,000 and he didn't have to deal with this whole process.
11:54
SPEAKER_01: Someone else took over.
11:56
SPEAKER_01: I was lucky enough to get to watch her in action.
12:00
SPEAKER_01: So she went in there, blank piece of paper, wrote down a number and said, This is the figure that the owner would like to offer you if you're willing to accept it.
12:09
SPEAKER_01: At no point did she say, You must take this, uh, we're demanding this of you, there's a timeline.
12:15
SPEAKER_01: That was not the case.
12:16
SPEAKER_01: It was an open discussion.
12:18
SPEAKER_01: She got to hear the tenants uh out and they settled on a on a price right in front of me.
12:24
SPEAKER_01: It was written down on a uh legal pad and date everyone signed it and it moved out just fine.
12:32
SPEAKER_01: So it doesn't have to be a complicated situation.
12:37
SPEAKER_01: What would be another do that comes to mind, Cody?
12:40
SPEAKER_00: So if one of my clients just purchased a building, I would say do start negotiations right away.
12:47
SPEAKER_00: Um when a building sells, a lot of times tenants are expecting there to be a change, whether it's a rent increase or you know, they may be expecting to have to move.
12:56
SPEAKER_00: Um, if you sit on the building with the rents the way they are for a few months after closing, tenants are gonna be like, well, it seems like everything's okay.
13:06
SPEAKER_00: This owner, you know, obviously can handle where the rents are.
13:10
SPEAKER_00: Um and then if you approach them later and ask them to accept cash for keys, it may throw them off a little bit.
13:17
SPEAKER_00: So I I've my clients have had better luck negotiating immediately after close.
13:21
SPEAKER_00: So I'd say, don't wait, just you know, get on it right away.
13:24
SPEAKER_01: And I agree, if you're working with with someone like us, we're gonna, you know, we tell people that when when we help someone buy the first apartment building, we're we're in it for the long haul.
13:33
SPEAKER_01: So we're not just in it for the for the transaction portion you close and then you're on your own.
13:38
SPEAKER_01: We're gonna stick with you, we're gonna help this process too.
13:41
SPEAKER_01: And so when Cody says start it immediately, well, what he means is is when we were helping you buy it, if part of the business plan, this is a business.
13:50
SPEAKER_01: You're you're buying an apartment building that's a business, it's an a complete um up and running operation.
13:57
SPEAKER_01: If your business plan is to um get started on the cash for keys process right away, then we need to get started immediately.
14:05
SPEAKER_01: Okay, and it makes sense that the tenants at this point.
14:09
SPEAKER_01: I I get to speak with a lot of tenants because on buildings that we're selling, I have to go speak with them.
14:13
SPEAKER_01: Not so much about this topic, but they will always ask me, hey, I know that you're the one selling the building.
14:18
SPEAKER_01: Are they gonna ask me to move?
14:20
SPEAKER_01: And I remind them, hey, there's state laws protecting you.
14:24
SPEAKER_01: Um and there's gonna be certain cities in.
14:26
SPEAKER_01: So if whoever's watching this, um, we are gonna be using the statewide rent control versus individual cities.
14:34
SPEAKER_01: More and more individual cities are passing their version of rent control, and they're a lot more restrictive than the statewide.
14:42
SPEAKER_01: Other cities, like Los Angeles City proper, had has had a long-standing rent control in the city before statewide, and so they're gonna be a lot more restrictive.
14:54
SPEAKER_01: And so anybody watching this in Los Angeles City, some tenants could be offered as much as$27,000.
15:04
SPEAKER_01: And that is a that's because that city alone has that requirement and a different process that you have to go through.
15:11
SPEAKER_01: Most other cities don't, the majority of the cities don't, but there is statewide rent control that you have to go through.
15:17
SPEAKER_01: And so getting started early, giving them notice is a definitely must-do.
15:23
SPEAKER_00: Yeah, and so I think you make a great point.
15:26
SPEAKER_00: Uh one other big do is to make sure to check your local ordinances just to know if there's a more strict rule for negotiating cash for keys than we have at the state level, like in the city of LA.
15:39
SPEAKER_01: Cody, let's talk about some don'ts.
15:41
SPEAKER_01: Like what's what's the wrong way to approach this this discussion with a tenant?
15:47
SPEAKER_00: So one big don't is don't negotiate with the entire building at the same time.
15:55
SPEAKER_00: So what can happen is let's say you close on a building, you're excited because it's a big value add deal, there's lots of upside in all the rents, and you want to go and give notice to all the tenants or trying to negotiate with everybody right at the beginning.
16:08
SPEAKER_00: Uh, what can happen is those tenants can talk to one another and they can collectively bargain against you.
16:15
SPEAKER_00: So it can kind of work, work against you.
16:17
SPEAKER_00: It's it's better to negotiate deals with um tenants kind of individually and work your way through the building.
16:24
SPEAKER_01: So kind of going back to the business plan is if you're buying in in this case, let's call it a 12-unit building, maybe maybe say, well, we're only going to start off with maybe three of them, right?
16:34
SPEAKER_01: And then the rest are just fine, and then you kind of work your way through.
16:38
SPEAKER_01: Um, that's probably the right strategy.
16:39
SPEAKER_01: What are a couple don'ts in the situation?
16:42
SPEAKER_00: Um, so we we kind of already talked about this one, but don't start too low.
16:47
SPEAKER_00: That's that's a big one.
16:48
SPEAKER_00: So if you're you know trying to get away with offering a couple hundred bucks for somebody to leave, it can leave a bad taste in their mouth and make the rest of the negotiations much more difficult.
16:58
SPEAKER_00: Sometimes they don't realize that it's a negotiation and that you may be willing to go up in price, and then they might clam up and stop talking to you altogether.
17:06
SPEAKER_00: Uh, another big one, don't harass the tenants.
17:10
SPEAKER_00: So um sometimes tenants just don't want to talk, they don't want to hear an offer, and you don't want to push them because harassment can get you in a lot of trouble as a landlord.
17:20
SPEAKER_00: Um, so just you know, if if it gets to that point, maybe switch strategies, um, you know, maybe stop trying to force the cash for keys option.
17:30
SPEAKER_00: Uh, and then the last one is don't get emotional.
17:33
SPEAKER_00: So this is a business, you know, um sometimes it can feel like a lot of money that you're paying to a tenant to leave a building that you own.
17:41
SPEAKER_00: But what you have to remember at the end of the day is um by being able to raise rents, you're gonna add a significant amount of value to this building, and it can get emotional for the tenant.
17:52
SPEAKER_00: Um, you know, you're asking them to kind of uproot where they've been living, it can disrupt their lives.
17:57
SPEAKER_00: So you have to be understanding of that, and it's easy to kind of get wrapped up in in these talks with tenants and get emotional and make bad decisions.
18:05
SPEAKER_00: So just try and avoid that.
18:07
SPEAKER_01: One thing that I recommend when we're when we're looking at the cash for keys scenario, Cody, is is figure out if you're thinking about selling, okay, what is the as is value?
18:19
SPEAKER_01: What is the as is values?
18:20
SPEAKER_01: What does that mean?
18:21
SPEAKER_01: That means with the current low rents, we've determined that this is what the property's worth.
18:27
SPEAKER_01: Okay.
18:28
SPEAKER_01: Now we are gonna do an analysis.
18:31
SPEAKER_01: Well, what happens if what happens if if we're able to successfully negotiate cash for keys and deliver the property vacant?
18:40
SPEAKER_01: For those watching, sometimes and and especially in Southern California, a lot of investors look at buildings and they're their first question is can all the units be delivered vacant?
18:51
SPEAKER_01: Why are they asking that?
18:52
SPEAKER_01: Well, they do not have to go through this cash for keys process.
18:56
SPEAKER_01: Someone else has done it.
18:57
SPEAKER_01: Okay, well, there's benefit to that.
18:59
SPEAKER_01: And so from our perspective, we're gonna say the as-is value with the low rents is this much.
19:04
SPEAKER_01: We believe that the value would really be this.
19:07
SPEAKER_01: Now, in some cases, Cody, I mean that value could shoot up quarter million dollars, half a million dollars.
19:14
SPEAKER_01: I mean, it could be substantial.
19:16
SPEAKER_01: That's not always the case.
19:17
SPEAKER_01: Sometimes it only might it might only be like another 10%.
19:20
SPEAKER_01: Okay.
19:21
SPEAKER_01: So then we have to work backwards is okay, if the property is gonna go up by$100,000, how much are we willing to pay to get to that point?
19:32
SPEAKER_01: So this is all an equation.
19:33
SPEAKER_01: This is not us just choosing a number and going with it, or that feels right, or let's meet in the middle.
19:39
SPEAKER_01: This is an educated decision that we're doing because we were trying to achieve a certain value.
19:44
SPEAKER_01: And so, again, if you're working with us, that's a service that we're gonna provide you, as is, and what will it be?
19:50
SPEAKER_01: And we'll support it with data.
19:51
SPEAKER_01: Okay, so that's something that we definitely recommend.
19:53
SPEAKER_01: Now we're gonna get into some other creative ways because the cash for keys is one option, but there really is a few other ways that you may have not heard.
20:02
SPEAKER_01: Uh, talk to us about the um about the makeover.
20:06
SPEAKER_00: Okay, so this is a strategy that uh I've also used in the past.
20:10
SPEAKER_00: We call it the apartment makeover.
20:12
SPEAKER_00: And um, in in the situation in which I used it, the tenants they were having a hard time finding another property that was going to accommodate them, and you know, they didn't want to accept a cash for keys payout.
20:28
SPEAKER_00: Okay.
20:29
SPEAKER_00: Um wanted to work with them.
20:30
SPEAKER_00: So what we decided to do is I paid for them to move into a hotel for a couple weeks, I renovated their unit, and then they moved back in with a new lease at a new market rent.
20:43
SPEAKER_00: And um, they got a brand new unit, they're much happier in it.
20:47
SPEAKER_00: Um, I get a higher rent for that unit, so I'm happy too.
20:51
SPEAKER_00: So let's let's break down that exact scenario.
20:54
SPEAKER_01: A lot of times, you know, if if we go into it thinking that the cash for keys is they have to leave, well, let's think about that.
21:00
SPEAKER_01: If they leave, they have to go rent somewhere else.
21:02
SPEAKER_01: So they have to go to a completely new place that they may not know like and trust.
21:06
SPEAKER_01: Well, guess what?
21:07
SPEAKER_01: If they've been longtime tenants in the building that you just purchased, which was the case with Cody, um, they know like and trust that neighborhood, that area.
21:15
SPEAKER_01: Um, they feel comfortable there.
21:17
SPEAKER_01: So naturally so, and um typically when when someone's a a tenant and they've been in for a long time, it's really hard for a landlord to come in and do the entire kitchen, do the entire bathroom.
21:32
SPEAKER_01: Every now and then a landlord can paint, maybe do flooring, but it's really hard for them to do what we call substantial renovations, okay?
21:40
SPEAKER_01: Uh, where they've completely repositioned the building via just a complete remodel.
21:46
SPEAKER_01: And so the apartment makeover is okay, you want to continue living here?
21:51
SPEAKER_01: What if I offered you this?
21:53
SPEAKER_01: Now, it's always what if I offer you this?
21:56
SPEAKER_01: We're not making them do anything, which is simple options, and so.
22:00
SPEAKER_01: It could be that they've been living there for seven years and you know the cabinets are not, you know, they're just dated and they would love for them to be improved.
22:08
SPEAKER_01: Well, I'll tell you that most landlords are not going to improve it until it's vacant.
22:11
SPEAKER_01: So that means when it gets improved, the tenants are long gone and they never get to see how much nicer it is.
22:16
SPEAKER_01: But in this situation, the apartment makeover, it's a simple conversation.
22:20
SPEAKER_01: Would you be willing to do this if I could remodel it?
22:24
SPEAKER_01: If so, then the rent would be this.
22:26
SPEAKER_01: Okay.
22:27
SPEAKER_01: That again is done via a conversation, and then we put everything in writing.
22:31
SPEAKER_01: Okay, so those two things.
22:33
SPEAKER_01: And again, with the apartment makeover, that's something that you as the owner could definitely do.
22:38
SPEAKER_01: 100%.
22:39
SPEAKER_01: If you're if you're buying something, that's a simple conversation.
22:42
SPEAKER_01: If you're selling, that's another conversation that you could have because you're trying to accomplish the same thing with in that specific scenario.
22:50
SPEAKER_01: What's another creative option that some of the folks may have not heard of?
22:53
SPEAKER_00: So another option is called the tenant shuffle.
22:57
SPEAKER_00: So this works really well in buildings where there's similar units.
23:00
SPEAKER_00: Like let's say you buy a four-unit and it has all two-bedroom units.
23:05
SPEAKER_00: You bought it all four of the rents were low.
23:07
SPEAKER_00: You negotiated cash for keys with one tenant, so now you have a vacancy.
23:11
SPEAKER_00: Let's say you remodel that vacancy.
23:13
SPEAKER_00: Well, your next step is either to lease it out to a new tenant, or you could look at offering it to the existing tenants in the building.
23:22
SPEAKER_00: And not only would they be paying a higher rent than they're paying now, but you get another vacancy.
23:26
SPEAKER_00: So you shuffle them from their current unit into this newly remodeled unit in this building that they already know, like, and trust.
23:33
SPEAKER_00: And it can save you a lot of money by having not having to pay them, you know, cash for keys.
23:39
SPEAKER_01: I I love this scenario and it's it's um crazy how a lot of investors don't think this.
23:45
SPEAKER_01: They don't they they don't think if if you're if you remodel one unit, you have to start over meeting a new tenant.
23:51
SPEAKER_01: That's starting all over.
23:53
SPEAKER_01: Well, you don't know what the tenant's gonna be like, they don't know what you're gonna be like.
23:56
SPEAKER_01: So it's this this complete unknown.
23:58
SPEAKER_01: Can you find someone to rent it?
23:59
SPEAKER_01: In Southern California, we have a scarce, it's a we have a housing shortage, so of course it's gonna rent.
24:06
SPEAKER_01: But why not offer it up to the existing tenant base?
24:09
SPEAKER_01: I think that is a glaring mistake that is done all the time.
24:12
SPEAKER_01: Offer it up to the existing tenant base.
24:15
SPEAKER_01: Start there before you put it on Zillow.
24:18
SPEAKER_01: Give them the option.
24:19
SPEAKER_01: Because all we're doing in all of these scenarios, I want everyone to be very clear, we're giving options.
24:25
SPEAKER_01: Again, at no point are we saying you must do this or we're demanding this of you, because that's not the approach that we think anyone should be taking.
24:32
SPEAKER_01: Again, we are.
24:34
SPEAKER_01: If you're lucky enough to be a landlord, and I'm gonna say a couple things about that.
24:39
SPEAKER_01: Yes, you're lucky enough, but you did take a lot of risk.
24:42
SPEAKER_01: You did a lot of savings to be able to save up that money to be able to go qualify and be able to purchase it.
24:47
SPEAKER_01: If you're lucky enough to be in that position, now you've taken a lot of risk.
24:49
SPEAKER_01: I respect that.
24:51
SPEAKER_01: We have to also respect the fact that we're in a landlord-tenant situation, okay?
24:55
SPEAKER_01: And the business that we're in involves housing.
24:58
SPEAKER_01: Okay, so make sure that we're very sensitive in all these cases and providing the options is one of them.
25:03
SPEAKER_01: And so knocking on the tenant's door and saying, We just finished remodeling, would you mind taking a look?
25:08
SPEAKER_01: They'll they'll walk through it, they see their unit, and they're like, Man, I would pay much more to be in that unit, and that's the option that you're giving them.
25:15
SPEAKER_01: So I love, I love the tenant shuffle, and that's one that doesn't even require, I think, in my opinion, is even better.
25:23
SPEAKER_01: You don't have to do a cash for keys, and the tenant is not displaced.
25:27
SPEAKER_00: They can move immediately.
25:28
SPEAKER_00: Yeah, that's great.
25:30
SPEAKER_01: Cody, uh, sticking with cash for keys, what should a landlord consider in a potential payout?
25:38
SPEAKER_00: So payout gets a little tricky.
25:40
SPEAKER_00: It really depends on where you are.
25:42
SPEAKER_00: In the city of LA, it's gonna be much different than it is in, say, Long Beach.
25:47
SPEAKER_00: So when we're talking about this with clients, we really want to know what the options are.
25:52
SPEAKER_00: So substantial remodel is kind of your surefire way to get a unit vacant.
25:58
SPEAKER_00: And in the city of Long Beach, if you're going to give notice to a tenant to vacate a unit so that you can substantially remodel it, your payout to them is a minimum of$4,500, plus you're going to be paying permit fees on top of that so that you can even serve that notice.
26:14
SPEAKER_00: So that's kind of our floor, is right around$4,500, is what we would say.
26:18
SPEAKER_00: Don't offer less than that.
26:20
SPEAKER_00: Um, I've heard of negotiations going as high as$12,000.
26:25
SPEAKER_00: Um, and you know, these costs we're going to back into them because we're gonna look at okay, how much are you gonna be able to raise rent?
26:33
SPEAKER_00: How much is that new rent gonna increase the value of the building?
26:37
SPEAKER_00: So even though$12,000 may seem like a ton of money to offer to a tenant, it can make a ton of business sense to do that.
26:45
SPEAKER_00: In the city of LA, where um it's more difficult to get tenants out, I've heard of people offering as much as$70,000 to get get a unit vacant.
26:54
SPEAKER_00: Um, and it can still make a ton of business sense to do that.
26:58
SPEAKER_00: So um, yeah, really it just depends on where you are.
27:01
SPEAKER_00: Uh, and those those numbers are things that we can help you calculate.
27:05
SPEAKER_01: Perfect.
27:06
SPEAKER_01: I'm seeing on average in Long Beach alone, we're seeing on average, we're seeing anywhere between 5,000 to 7,500.
27:13
SPEAKER_01: So that's the range.
27:14
SPEAKER_01: Can you be above it?
27:15
SPEAKER_01: Certainly.
27:16
SPEAKER_01: If you have a relationship with a tenant, can you do more?
27:18
SPEAKER_01: Of course.
27:19
SPEAKER_01: It's always a negotiation.
27:21
SPEAKER_01: And again, at the end, it's gonna have to be a win-win because you both need to do it.
27:26
SPEAKER_01: Um, let's talk about when that fee is paid, Cody.
27:29
SPEAKER_01: When do you when when should someone pay the fee?
27:31
SPEAKER_00: Okay, so this is important.
27:33
SPEAKER_00: You don't want to give the cash up front.
27:35
SPEAKER_00: You don't give cash until you get possession.
27:39
SPEAKER_00: Because if you give your cash away and then the tenant decides not to move, you're in a lot of trouble.
27:44
SPEAKER_01: So yeah, so one of the things that I've seen uh in in the scenario that I got to be part of was the the tenant came back and said, Well, great, but I need to give the deposit to the new place.
27:55
SPEAKER_01: And so what I saw in that scenario was the owner did not give the money to the tenant, gave it to the new landlord, knowing here's the deposit, and that made part of the um um the overall fee.
28:06
SPEAKER_01: And so again, you do have to protect yourself.
28:08
SPEAKER_01: You you're not just cutting checks, you're being smart about it, it's being timed.
28:13
SPEAKER_01: Ultimately, what you really do want to do is they give you the keys, you've inspected that it's completely empty, and then you give a check.
28:21
SPEAKER_01: Okay, so it's kind of like a that you need to believe in them, they need to believe in you type situation, because they're also counting that you actually give them a check.
28:29
SPEAKER_01: And landlords, please give them a check.
28:31
SPEAKER_01: I mean, don't don't negotiate something and then go back and not do that.
28:34
SPEAKER_01: In fact, that would get you in a really sticky situation if you did that.
28:38
SPEAKER_01: So we're not uh suggesting that you do anything like that.
28:42
SPEAKER_00: Yeah, and another do that we we didn't cover, but is really important is to get the stuff in writing.
28:47
SPEAKER_00: So make sure any negotiation you come to with a tenant is in writing.
28:52
SPEAKER_00: You've both signed it.
28:53
SPEAKER_00: Um, so that if there is any issue, you can refer back to it.
28:56
SPEAKER_01: Got it.
28:57
SPEAKER_01: So now I want to talk about substantial renovation.
29:00
SPEAKER_01: So you've tried the cash for keys, you've tried the tenant shuffle, the apartment makeover.
29:06
SPEAKER_01: Now, if you're in Long Beach or a similar city, not LA City, okay, if you're in Long Beach, we still have the thing called the substantial renovation clause.
29:16
SPEAKER_01: Okay, and I know we've covered it, but this is for any investor thinking, oh my gosh, Juan and Cody want to sell me this building.
29:24
SPEAKER_01: I love the building, the rents are low, I'm not gonna buy it.
29:27
SPEAKER_01: You're really doing yourself a disservice because you're stopping at a very obvious point where you shouldn't.
29:33
SPEAKER_01: There are options to all of this.
29:35
SPEAKER_01: And so, like Cody said, a sure way is the substantial renovation clause.
29:42
SPEAKER_01: What you're gonna do is give a 60-day notice, offer to pay them either two months' rent or$4,500, whichever is higher.
29:51
SPEAKER_01: So again, if the tenant's rent is$3,000, well, guess what?
29:54
SPEAKER_01: They're getting$6,000 based on um the state law.
30:00
SPEAKER_01: And so a$6,000 check, 60-day notice, and that's what you present to them.
30:05
SPEAKER_01: What the city of Long Beach is requiring, that you, as the landlord, don't just use this as a uh loophole, that you actually remodel the unit.
30:14
SPEAKER_01: And so what they're requiring is that you're pulling the permits and that the and that the work that you're doing is going to take 30 days, and that the work that you're doing could could have not happened with the tenant in place.
30:26
SPEAKER_01: So if you're remodeling a bathroom and a kitchen, uh that type of situation, there's no way a tenant can live there through without a kitchen, right?
30:32
SPEAKER_01: So that's not possible.
30:33
SPEAKER_01: So under those circumstances, you still have the substantial renovation clause.
30:38
SPEAKER_01: The reason we're covering this is because a lot of people are, again, preventing themselves from taking that step of becoming a business owner in in the world of apartment ownership because they believe that it's going to take too long to get the rents up.
30:56
SPEAKER_01: And so all we're saying is other people are doing it.
30:59
SPEAKER_01: And I've always had the feeling that if others could do it, I could do it too.
31:02
SPEAKER_01: If others could take the risk, if others could save the money, if others could buy this property, if others could become millionaires owning apartment buildings, I could do it too.
31:10
SPEAKER_01: And that's what we want you to know.
31:12
SPEAKER_01: But it starts with hopefully you watch this video and you know that there's options for you.
31:18
SPEAKER_01: Nothing's a guarantee because you could do everything we just offered you, and there's no guarantee, but that's part of the risk.
31:25
SPEAKER_01: That's part of the risk that we're taking.
31:28
SPEAKER_01: Now, the other option that you have at the very end is just going by the allowable rental increases.
31:34
SPEAKER_01: Okay.
31:34
SPEAKER_01: So right now, currently, uh up until August 1st, the statewide rent control law, or actually in in Southern California, the LA uh county area, allows us to raise the rents by 10%.
31:48
SPEAKER_01: Okay.
31:48
SPEAKER_01: So 10% is the allowable, but starting April 1st, that's going to actually adjust down.
31:54
SPEAKER_01: It's going to be 8.8% for some of you that may have missed our previous video.
31:58
SPEAKER_01: So now move starting August 1st in the city of Long Beach, you could raise the rents by 8.8%.
32:05
SPEAKER_01: That is another way, is that if you're an investor and you're buying a building and none of these other options worked, or you decided that you didn't want to do those options, it's still important that you're adjusting the rents because why?
32:22
SPEAKER_01: Because inflation is happening around you, whether you like it or not.
32:25
SPEAKER_01: So everything is getting more expensive.
32:27
SPEAKER_01: And so you as a landlord need to be prudent enough to say, well, I bought this building, it's losing me money, and I want to at least make it break even.
32:38
SPEAKER_01: All right, because there's not this excessive clash flow like a lot of people think.
32:42
SPEAKER_00: All right, so there you have it.
32:43
SPEAKER_00: We hope you learned a lot about cash for keys.
32:46
SPEAKER_00: We covered the do's, the don'ts, some creative problem solving, and we talked about some resources that we have access to.
32:52
SPEAKER_00: So if you'd like help with cash for keys or you'd like some of these resources, feel free to reach out to us.
32:58
SPEAKER_00: We'd love to help you.
32:59
SPEAKER_01: Thank you so much for watching.
33:01
SPEAKER_01: Make sure that you follow Cody's new channel.
33:03
SPEAKER_01: We're gonna have the link in the bio.
33:05
SPEAKER_01: If you like my my channel, you're gonna love what he's talking about.
33:08
SPEAKER_01: And so that's it for now.
33:09
SPEAKER_01: Make sure to like, comment, and subscribe.
33:11
SPEAKER_01: Until next time.