Foreclosure Investing: What RE Investors Need to Know About Buying Foreclosed Properties with Right of Redemption Periods

If you’re thinking of getting your piece of the real estate pie by doing some foreclosure investing, you need to be very careful. For, while you can make a lot of money investing in foreclosures, there are a lot of pitfalls too.

Here, we’re going to discuss foreclosure investing as it relates to buying properties that have right of redemption periods.

Foreclosure Investing: What are Right of Redemption Laws

IN essence, it’s a law that many states have that permits homeowners to “redeem” their property, even after it has been sold as a foreclosure. To learn more about Right of Redemption laws, see the post, Right of Redemption Laws: How to Get Your Home Back – Even After It’s Sold as a Foreclosure.

Now that you know what right of redemption laws are, it should be pretty obvious that when doing foreclosure investing, you have to be extremely careful because you could be out an investment – and plenty of money – before you know it.

Foreclosure Investing: Property Investors Rights and Realities When Buying Right of Redemption  Properties

1. Know the Redemption Period in the Jurisdiction in Which You’re Buying: This period is set by state law – and it varies widely. It can be anywhere from a day on up to two years (Tennessee).

If the redemption period ends by the time you purchase the property, then great, no worries. BUT, if the period extends beyond the sale date – and many do – then you need to know the following.

2. Don’t Fix Up Property Until Redemption Period is Over: Why? Because you can lose this investment capital. How?

Owners who exercise their right of redemption are not required to pay back any monies an investor has spent in fixing up the property. They are only required to pay mortgage arrears, taxes and fees the lender incurred in selling the property.

So, if you buy purchase a foreclosed property and fixed it up before the redemption period is over AND the owner hits the jackpot or in some other way comes up with funds to purchase the property back, any monies you spent in fixing, repairing and upgrading the property is your loss.

3. Buy Redemption Rights from Owner Where Possible: Many new property investors who are just getting into  “foreclosure investing” aren’t aware that they can buy the redemption rights from an owner . . . and usually for only a nominal amount (eg, a few thousand dollars).

Usually, a homeowner facing foreclosure will do this because they’re going to lose the property anyway, and they don’t see a way to redeem it in a year or two. Face it, most people’s financial situation just doesn’t turn around that quick.

So, selling those rights gives them some ready cash.

4. Buy Foreclosed Properties via Redemption Rights: What we mean by this is, buy the rights from the homeowner first, then use those redemption rights to buy the property after it has been foreclosed on. This can save you a lot of money as an investor.

To explain, let’s pretend you want to buy a property that has a fair market value of $100,000. There’s a first mortgage on it for $50,000; a second one for $40,000; and a contractor’s lien for $10,000.

The lender with the first mortgage (the one for $50,000) is the one who is foreclosing. This lender will get money from the foreclosure sale. Whether the property sells for enough will determine whether the second mortgage lender or the mechanic’s lien is wiped out.

Eg, i it sells for $50,000 or less, the second lender and the mechanic lien holder won’t get any funds.

Now comes the interesting part . . .

If you hold the redemption rights, you can swoop in after the home is sold in foreclosure and pay the redemption price ($50,000), plus any late fees, interest, etc. Even if these added another $20,000 to the price, you will still have bought a property with $30,000 in equity in it (remember, the fair market value is $100,000).

5. Line Up Your Financing: Have all of your financial ducks in a row if you plan to buy foreclosed properties using this method, or you could lose out on a good deal. Particularly in these foreclosure-ridden times, many sellers (especially if they’re lenders) want cold, hard cash.

6. Resolve Title Issues: There can be more than one party with redemption rights on a property. So, make sure the title is completely clear.

P.S.: Buy cheap foreclosures and have a $45/month mortgage — really! 

Copyright © 2009 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author