Having trouble finding a good deal? You are not alone!
With the current low inventory market and surging sale prices, you may be looking to purchase a foreclosed property for the first time or in a new state. If this is you, I am here to help examine a possible risk you may not be aware of: The Right of Redemption.
While I cannot speak to the spiritual redemption spoken of in religious text, I am here to walk you through the legal Right of Redemption. What is it, what risks does it pose to anyone purchasing a foreclosed property, and what are the ways to help mitigate some of those risks?
What is the Right of Redemption?
The Right of Redemption is the legal right for the borrower to stop a foreclosure on a property by paying off any debt, including, but may not be limited to, interest, fees, and penalties.
Although there are some variables, for most residential properties, this is required in every state during the foreclosure process, known as the Equitable Right of Redemption. However, many states also permit this for some time after the property is sold, known as the Statutory Right of Redemption.
Since state laws may change, here is a good resource that lists by state the foreclosure laws and the Right of Redemption.
Keep in mind, even if the state law does not include these statutory rights, their mortgage or deed of trust might. Just in case you are unfamiliar with the differences between a mortgage or a Deed of Trust, here is a good article that breaks the two down.
Admittingly, it is unlikely someone will be able to pay off the debt with all the additional costs if they are substantially behind on their mortgage. However, the mortgagor can sell the property before foreclosure to another party, refinance, or re-purchase the property after the sale at the foreclosed purchase price, free of liens, incentivizing them to do so.
It is also important to be aware that lien holders may redeem their rights as well under these statutory redemption laws.
Understandably, this presents serious concerns if you are purchasing a foreclosed property as you do not receive title and/or possession of the property until the end of the redemption period.
Statutory Right of Redemption Period
So how much time are we talking about here?!
The Statutory Right of Redemption period varies depending on several factors. It can range as widely as just 30 days up to 2 years! Although between 6 months to 1 year is about average.
While researching foreclosure laws in your state, here are some key variables to look into when considering the redemption period:
- The state redemption statute
- Judicial vs. nonjudicial foreclosure
- Judicial – a lawsuit is filed which is processed through the courts
- Nonjudicial – state-specified foreclosure procedures are followed which are handled out of court
- Typically, nonjudicial foreclosures are faster than judicial ones. For that reason, many mortgages will include a Power of Sale clause authorizing the mortgage company to file a nonjudicial foreclosure for non-payment if permitted by the state.
- Judicial vs. nonjudicial is significant because in most states when a nonjudicial foreclosure is permitted, it will terminate the Statutory Right of Redemption.
Reviewing the Risk for the Right of Redemption
As the name implies, the statutory right is determined through the state statutes. Thus, the risks also vary from state to state.
However, some common risks associated with the Right of Redemption include:
- In some states, the borrower may repurchase the property for the auction price, excluding the redemption price or any additional costs associated with the foreclosure purchase or improvements.
- The borrower may also sell their Right of Redemption to another party, who may, in turn, be able to purchase the property for the auction price during the redemption period after purchase.
- However, some cities or counties require the party redeeming the property to pay interest to whoever purchased the property at auction. It may not be much, but it’s a little something if this does happen!
- Depending on the state, the borrower may continue to occupy the home during the Statutory Right of Redemption period.
- Even after the redemption period, if the occupant refuses to leave, you must still go through the state’s proper eviction protocols or offer cash for keys to incentivize the occupant to leave.
- If purchasing a non-owner-occupied property with tenants, the tenants have both federal and varying state tenants’ rights which must still be honored.
- For example: In California, a new owner must adopt an existing long-term lease. In some cities, a foreclosure may not be an acceptable cause for eviction. This would be a particular risk if you are adopting a tenant paying rent that is substantially below market.
- An additional concern with renting a property during the redemption period is that if the borrower reclaims ownership, the tenant may be required to vacate the property. In this case, it would be prudent to include a clause in the lease to cover this potential occurrence.
- The property is purchased as-is, without any seller disclosures guaranteeing the property’s condition. However, there are some protections here discussed further along.
Right of Redemption Risk Management
I know, I promised you would not need your spiritual guide to help you through this, and yet I give you all this gloom!
Thankfully, I am a woman of my word who was just saving the good news for last.
Tip # 1: First, because it’s by far the most important, if you are purchasing a foreclosed property, be sure the deal still works if you must keep the property as-is throughout the redemption period. The last thing any investor wants is sprucing up a place for someone else to reap the rewards! Not to mention other potential legal risks as you may be liable for the quality of any work done.
Tip # 2: Earlier we discussed the risk of purchasing the property as-is. However, you are still entitled to an inspection should you wish. The inspection would protect you two-fold. First, it catches critical issues… okay, you knew that! Secondly, if the borrower refuses access for inspection after notice is given or urgent repairs are needed which the borrower is unable to remedy, the redemption period can be annulled.
Tip # 3: Similarly, if the property has been abandoned, the redemption period may be shortened substantially.
Tip # 4: Here is one for us regular folk. If a third party (us), rather than a bank, purchases the property at a foreclosure sale, the law may stipulate a shorter redemption period.
Tip # 5: There may also be mortgage documents that waive the borrower’s rights. However, in redemption states, this is unlikely to hold up except in situations regarding corporations. This may be worth looking into if you are purchasing a property owned by a business.
Tip # 6: Lastly, being the clever investor that you are, you probably recall that the borrower may be able to sell their Right to Redemption. It could be worth exploring this arrangement as well. Just be sure to work with an attorney who can confirm the documents are filed properly and the title is clear, as lien holders also hold rights.
While I wish I held the power to redeem us all, I’m a simple señorita happy to help even if only a smidge along your way. Hopefully, I have helped you recognize how the Rights of Redemption can ruin your investment goals if you are unprepared. Maybe I have even inspired you to research your state’s foreclosure laws to look for some of the above-mentioned common factors that may affect you. But even if you are currently in this situation, I hope these tips help you navigate and maybe even eliminate, or at least reduce, the redemption period.
Although it sometimes seems like the apocalypse may be upon us, I am confident in a bright future with great deals coming our way. When it arrives, I know you will be ready alongside me at those pearly gates.