Buying foreclosures usually means bidding at a foreclosure auction or making offers to a banks for properties. This can be a time consuming and frustrating process. However, what if an investor could go straight to a property owner and acquire their right of redemption? We discuss how in this article.
What Is the Right of Redemption in Real Estate?
The right of redemption is a statutory right that gives a defaulted property owner (debtor) the right to get the property back after it’s been sold at a foreclosure auction. The former owner can “redeem” this right by paying off the outstanding mortgage which was foreclosed on, then applying to have the auction sale canceled after the fact.
The right of redemption can last anywhere from 1 to 12 months. During this time the former homeowner can raise the necessary money to pay back the defaulted mortgage in full, then reverse the foreclosure.
States that have the right of redemption expose foreclosure auction buyers to the risk that they will lose the property after successfully winning the auction and paying for it. The auction buyer generally receives the full amount paid at auction back, but not any legal costs, further investment in the property, or money spent to clean up liens and other title issues.
Buying Rights of Redemption
In many states, the homeowner has the legal right to sell or transfer his or her right of redemption. Generally speaking, this is a right of omission — the state law does not make it illegal and therefore it is legal.
One tactic investors use is to seek out homeowners in financial distress and offer to purchase their right of redemption. An investor could offer $1,000 to $3,000 for the right — enough that it is not a de minimis amount. Selling the right of redemption for some cash in hand can help a homeowner in financial need, even if it’s not ultimately enough money to keep the home.
The goal of the investor in this situation is secure the property against the homeowner redeeming it after foreclosure. The investor acquires this right of redemption on the property for him or herself.
If the bank forecloses on the property and the property is sold at auction, the investor has a claim — similar to an option — to redeem and pay off the defaulted mortgage. This would then force the reversal of the foreclosure sale. This gives the investor the opportunity to acquire the property for the amount of the outstanding mortgage, without having to pay foreclosure auction fees, etc.
Another reason for an investor to buy the homeowner’s right of redemption is if the investor also intends to buy the property at the foreclosure auction. The investor is basically buying insurance to prevent the auction purchase from being reversed. If a particular property is desireable, this is one way to keep other investors from bidding it up because they know the investor will exercise his redemption rights.
In practice, investors will try to buy the right of redemption from the homeowner right before the foreclosure auction. That way they know the property is actually going to auction, and it’s not just a pointless waste of money.
Finding a Homeowner Willing to Sell the Right of Redemption
A debtor (property owner) can sell their right to redeem to someone else either before or after the foreclosure auction sale. That person can then exercise the redemption after the sale and force the property to be returned at the auction price. Even if a quitclaim deed has been issued, the homeowner can still transfer the right of redemption to another party.
An investor can buy the right of redemption from a homeowner for a fee anywhere between $1000-$3000 dollars. The main challenge is finding a homeowner willing to sell their right of redemption. The best way to do this is to approach many homeowners whose properties are in foreclosure an offer to buy their redemption rights. You can find these listings in the MLS, by contacting banks, and through direct mail advertising.
Cancelling a Tenant’s Lease
If a real estate investor manages to buy another homeowner’s right of redemption, they could still have to deal with tenants living in the property. This can happen if the auction buyer quickly rents out the property to new tenants.
This is more likely to happen if you wait awhile to exercise the right of redemption. Once an investor has exercised the right of redemption, the tenant’s lease is effectively cancelled and they must vacate the property.
However, this gets complicated in states with strong tenant protection laws. In some states tenants are protected from eviction, must be paid compensation, or must be given a long lead time to move out. Before acquiring a right of redemption, your should know your state’s laws regarding eviction of tenants.
Wait to Make Improvements
A real estate investor that buys a property through a foreclosure sale or auction should be ready to hold the property without making any improvements until the redemption period has passed. Legally, this period may be more of a gray marker than a solid one, as the original owner may bring legal opposition to the whether the statutory deadlines are being met. Therefore, investors should allow a cushion of time after the redemption period has passed to decrease the risk of this happening.
Increase the Property’s value
The Redeemer can use the one-year redemption period to conduct its due diligence investigation of the property. Moreover, the Redeemer will have the opportunity to operate the property and possibly increase its value.
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Timeframe After Buying the Right of Redemption
In some states, the right purchased must be exercised with one year of the foreclosure as long a deficiency judgement has been issued. If the sale proceeds from the foreclosure sale are greater than the debt on the mortgage, the right of redemption lasts only three months. If the right is exercised by the redeemer, the liens removed by the foreclosure sale do not remain connected to the property, which is an added bonus.
Preventing Redemption of the Property
The purchaser of the foreclosure may attempt to prevent the investor from redeeming the property. If this happens, the property investor should file a petition with the county superior court prior to the redemption period expiring. The court proceedings will be simple and fast, usually taking only 20 days or less. Conditional to court proceedings, the redeemer has to deposit the amount of the redemption price with the sheriff. If this amount is considered insufficient by the court, the redeemer has another 10 days after the court’s order to deposit more funds.
Buying the Right of Redemption in a Nutshell
Buying a property owner’s right of redemption can be a way to acquire foreclosed houses with having to bid or make offers on the property. However, this technique for acquiring foreclosed properties is rare and requires significant legal knowledge and skill.
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