Eviction against a negotiated exit after foreclosure, priced month by month on one illustrative REO, with the break-even offer by timeline and value.
The most a note investor should offer for cash for keys is what an eviction would cost in present value: the legal fees, the extra months of carrying costs, the expected repairs after a contested exit and, largest of all, the delay to the sale. On an illustrative house worth 212,000 where eviction takes four months and a negotiated exit one, the break-even offer is 19,759. An offer of 5,000 still leaves the investor 14,517 better off than evicting.
Worked in full in The Mortgage Note Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The foreclosure is done and the investor owns the house, but the former borrower still lives in it. There are two ways to possession. The eviction route goes through the court: filing, a hearing, a lockout by the sheriff, and an occupant with no reason to leave the place in good order. The cash for keys route is a short agreement: the occupant leaves by a date, hands over the keys and leaves the house broom clean, and is paid on the walk-through. Everything after possession, the repairs, the listing and the sale, follows either route. The question is how much the second route is worth. All figures are illustrative; the timeline to possession varies widely by state and by occupant.
| Input | Eviction | Cash for keys |
|---|---|---|
| Months to possession | 4 | 1 |
| Legal costs (attorney, filing, sheriff / agreement) | 3,500 | 500 |
| Expected repairs at possession | 9,000 | 2,500 |
| Carrying cost a month (taxes, insurance, utilities, REO management) | 650 | 650 |
| Months from possession to sale | 4 | 4 |
| Market value / selling costs | 212,000 / 7% | |
| Hurdle rate, annual, compounded monthly | 20% | |
Step 1: the value of each route before any payment. Discount the net sale, 212,000 less 7 per cent or 197,160, from the month it arrives, and subtract the present value of every cost.
NPV = net sale / (1 + 20%/12)sale month − PV(legal) − PV(carry to sale) − PV(repairs)
Eviction, sale in month 8: 172,739 − 3,443 − 4,831 − 8,424 = 156,041
Cash for keys, sale in month 5: 181,521 − 492 − 3,094 − 2,459 = 175,476
Excel, for the sale: =197160/(1+20%/12)^8
Step 2: the break-even offer. The negotiated exit is worth 19,435 more today, before the payment. The payment is made at the walk-through in month 1, so the offer that makes the two routes equal is that difference grossed up for one month.
Break-even offer = 19,435 × (1 + 20%/12) = 19,759
| Source | Out of pocket | Present value |
|---|---|---|
| Sale three months earlier | 8,782 | |
| Repairs avoided | 6,500 | 5,965 |
| Legal costs avoided | 3,000 | 2,951 |
| Three months of carrying cost | 1,950 | 1,737 |
| Total | 11,450 | 19,435 |
The largest item is not a cost anyone writes a cheque for. A month of delay on a house that will net 197,160 costs 3,286 at a 20 per cent hurdle, and with the 650 of carry each month of possession saved is worth about 3,936. The repairs line is the uncertain one: it is an expected figure, and an occupant who is being evicted has every incentive to make it larger.
| Months to evict | Value 100,000 | Value 212,000 | Value 400,000 |
|---|---|---|---|
| 2 | 11,378 | 12,976 | 15,659 |
| 4 | 15,042 | 19,759 | 27,676 |
| 6 | 18,587 | 26,321 | 39,302 |
| 9 | 23,689 | 35,766 | 56,036 |
Even where eviction is quick, the repairs and legal costs alone justify a five-figure ceiling. Where the occupant can contest, or a local moratorium stretches the timeline, the ceiling rises fast, and it rises with the value of the house because the delay cost is a percentage of it. The ceiling is not the opening offer: an offer of 3,000 leaves the investor 16,484 ahead and an offer of 10,000 still 9,599. The point of the calculation is to know how far to go before walking away, and to stop negotiating over a few hundred when each month of stalemate costs about 3,936.
If the occupant is a bona fide tenant of the former borrower rather than the borrower, federal law in the United States generally entitles the tenant to at least 90 days' notice before having to leave, and some states and cities give more. The eviction column then cannot start below three months, and the quick two-month line of the table no longer applies.
The common mistake is to compare the offer with out-of-pocket savings only: the legal fees, the carry and the repairs, 11,450 undiscounted. Leave out the earlier sale and the break-even drops to 10,831 in present value, and an investor who stops there will refuse offers that pay for themselves. The other mistake is paying before the keys: the agreement should pay on a walk-through, against a vacant, broom-clean house, with a deadline.
Possession is the last stretch of a non-performing note, after the court and before the resale. Its timeline drives the bid, as in what a judicial foreclosure takes off the bid and modify or foreclose. The deed in lieu, cash for keys and the REO are among the working documents of the free companion files for The Mortgage Note Investor.
Usually, once the delayed sale is counted. On an illustrative 212,000 house, eviction taking four months costs 3,000 more in legal fees, 6,500 more in expected repairs and three extra months of carry and delay. In present value at a 20 per cent hurdle, the negotiated exit is worth 19,435 more before the payment, so any offer below 19,759 is cheaper than evicting.
The hurdle rate on the net sale proceeds plus the monthly carrying cost. On a house netting 197,160 after 7 per cent selling costs, a 20 per cent annual hurdle costs 3,286 a month, and with 650 of taxes, insurance and utilities each month of delay costs about 3,936. That is the figure to weigh against a few hundred more in the offer.
On the walk-through, after the occupant has left and handed over the keys, and only if the house is vacant and broom clean by the agreed date. Paying in advance removes the incentive the payment exists to create. The agreement should name the date, the condition and the amount, here anything up to the 19,759 break-even.
This article is one calculation from The Mortgage Note Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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