With the right of redemption a borrower (mortgagor), or a third party who purchases the right, can reclaim a property during foreclosure or after a foreclosure auction sale. In this article we discuss who can exercise the right of redemption and how it affects the debtor, lender and buyer in a foreclosure sale situation.
The purpose of the right of redemption is to allow a homeowner the chance to reclaim their property up to the last minute — or even beyond the auction sale — if they can pay off their mortgage debt.
What Does Redeeming a Property Cost?
To stop a property foreclosure or auction by exercising the right of redemption the homeowner/debtor needs to pay off any mortgage liens, late fees and back taxes. Some states require the full balance of the mortgage to be paid plus fees to redeem the property.
In states that require redemption by paying off the original loan amount, the homeowner needs to request a payoff quote or statement from their loan servicer to find out the exact amount required to redeem the debt. This generally must be done before the foreclosure sale.
If redemption occurs after a foreclosure sale of the home, the debtor must pay the auction winner the price paid for the property. The debtor must also pay back any costs that the lender incurred to auction off the property and which were passed on to the winning bidder.
When Can the Property Be Redeemed?
All states allow the borrower to redeem the property by paying off the mortgage before a foreclosure sale. But not all states allow redemption after a foreclosure auction sale, and only for a certain limited period of time.
About half of all the states allow for right of redemption after a foreclosure sale or auction. Different states have different redemption periods, so investors should be familiar with each state’s time limits.
Additionally:
- Certain financial and property size stipulations may exist
- The redemption period depends on the type of foreclosure sale (judicial or non-judicial)
Some states do not allow the right of redemption to occur at all for homeowners.
Read this article to find out what states allow the right of redemption >
Statutory Right of Redemption
Homeowners in states who are allowed to redeem their property after a foreclosure sale must do so within a defined period of time. This right and time limit come entirely from a state statute, which is why it is called a “statutory” right of redemption.
Redemption is Not Common
It is rare that a homeowner will redeem the property during a foreclosure period. If they had the money to pay off the balance and fees, they would not have fallen behind in the mortgage payments in the first place.
The few homeowners that redeem their property during the foreclosure period often manage to get re-financing to pay off the current mortgage. This completely “resets” the lender-borrower relationship with a new mortgage lender, pays off the original mortgage and gives the homeowner a new start.
It Is Possible to Profit from Redemption?
In certain states, if a borrower exercises his or her right of redemption after the house is foreclosed and sold at auction (or after it becomes REO), the amount due is the foreclosure price plus auction fees. The house can then be sold by the homeowner who redeemed it for a higher price than the foreclosure price.
This situation can technically allow an unscrupulous homeowner to intentionally default on the mortgage, wait until the property is foreclosed and sold at auction, then redeem it at a lower price than what was originally owed. This deprives the auction buyer from the benefits of buying the home at auction, creates a loss for the mortgage lender, and rewards the original homeowner for defaulting.
By exercising its right of redemption, the homeowner can acquire the property back from the foreclosure auction buyer with the added benefit that liens extinguished by the foreclosure sale do not reattach. This means the homeowner gets a clean title back after causing the default in the first place. The only lien will be the new mortgage lender (if any).
In practice, this is exceedingly rare as homeowners in foreclosure are almost always in real financial difficulty. But this situation can be taken advantage of by savvy investors who purchase the right of redemption from the defaulted homeowner, then exercise it for a profit.
States that require the full repayment of mortgage debt to redeem the house eliminate the opportunity for this type of perverse behavior.
Buying the Right of Redemption
An owner can sell his or her right of redemption to another party, who can then exercise the right after the foreclosure sale. Buyers of redemption rights can include individual investors and investment companies.
This tactic can be used by savvy investors to arbitrage the foreclosure auction market as follows:
First, the investor buys the right of redemption from a current homeowner in the process of getting foreclosed, or a former homeowner who lost his or her home in a foreclosure auction. This must be done in writing under the guidance of one or more attorneys to ensure the investor’s right of redemption is recognized in court.
Second, if the property has not already been sold at auction, the redemption rights investor and the property owner allow the property to be foreclosed by the mortgage lender and sold at auction.
Third, the redemption rights investor must exercise the right of redemption. This is done through a judicial process by applying to the county court, or suing the winning buyer at the foreclosure auction. The investor will need to pay off either the foreclosure auction price plus fees, or the outstanding mortgage amount before the auction plus fees. This depends on the state.
Fourth, the redemption rights investor can either keep the property (obtained at a discount through redemption) or sell it on the open market and turn a profit.
Redemption of Investment Properties
If a real estate investor leases out a property bought at a foreclosure auction, and the original owner redeems the property, then the tenant’s lease will be cancelled and must vacate the property. It is a good idea for foreclosure property investors to include a disclaimer to this effect in the lease documents.
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. Investors should always allow this cushion of time in states where redemption is allowed. Waiting to invest further into the property until the redemption period has passed substantially reduces financial and legal risks.
Who Can Exercise the Right of Redemption in a Nutshell
In this article we discussed who can exercise the right of redemption and how it’s done. The right of redemption is a powerful way for both homeowners and investors to benefit during a foreclosure process, albeit in different ways. Investors need to do their due diligence and research their state laws regarding the right of redemption before purchasing a foreclosure property.
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