Foreclosure Redemption Period: OK to Work with Sellers?

Hey there, Cam Dunlap here. So, I was recently asked this interesting question on my coaching hotline:

“Could you go through how working with the seller during their redemption period for both mortgage, lien, or tax foreclosure would work and what we need to be aware of?”

Sure thing!

First, know that every state is a little bit different. Some states don’t have redemption periods, at least with regard to foreclosures. And, there may be a redemption period for a tax sale in an area where there is no redemption period on a foreclosure. 

Before we dive into that question above, let’s talk about what a redemption period is…

Imagine a homeowner falls behind on their payments, the lender files notice of default, time passes, and then there’s a foreclosure sale. That’s typically called a sheriff sale or a trustee sale. The property is auctioned off, and usually the bank will bid to the amount it’s owed or what’s often called the “upset price.” 

For example, if the bank is owed $200,000 plus arrearage and legal fees, which takes it to $220k, it’ll usually bid it up to $220k.

If nobody’s willing to pay more than that, well, the bank effectively buys it back. It takes it back through that process. 

Or, if the bank is owed its upset price of $220k, and I come in and I bid $225k, and end up winning the bid, the bank gets its $220k it’s owed, and $5,000 in that case may go to the seller.

It depends on how it works in that particular state and county, though. 

It’s very similar in the case of a tax auction. But what happens in a tax auction is that most of the liens are all wiped out, including the mortgage. What you’ll find at a tax auction is the high bidder is often the lender, because it doesn’t want to get its mortgage wiped out. It wants to treat it like a foreclosure. 

The lender, or the lender’s agent, will come in and bid it up to what it’s owed, the upset price. The borrower may or may not be in arrears with the mortgage, but they probably are, and they’ll bid it up. Then, a redemption period — assuming this particular state has a redemption period — begins, and it might be 60 days, 90 days, 180 days.

I don’t know that I’ve ever seen longer than 180 days. 

Now, it’s during that period of time that if the defaulted borrower who lost the house to foreclosure at the auction can come up with the $220k, which was the upset price, they can buy the house back effectively from whoever holds the title at that time. 

If the lender holds the title, the default borrower comes up to $220k, they can go and pay the bank and get their title back. It basically reverses the whole thing. 

Or, if I own it and I paid $225k, they come in and pay $220,000, I’m out $5,000, and I no longer hold title the property. If I’ve done any repairs on it during the redemption period, well, I’m just out those repairs. 

So, buying foreclosure properties in areas where there is a redemption period comes with an added layer of risk that the defaulted property owner could come back. 

Now, it is possible for someone to buy that right of redemption from the defaulted borrower/property owner, and then they redeem it. The bank gets their $220k, and they don’t have to deal with the house, and I lose $5k plus whatever money I put in it.

There are some strategies around all this. 

What you’ll find is that when lenders take houses back through foreclosure, they don’t turn around and list them for sale 2 weeks later. There’s title work they need to do. They may have some internal processes that it goes through. 

If there’s a redemption period, the bank might acquire that right of redemption from the defaulted property owner, so it now owns it and there’s no chance of redemption. Again, that redemption period does have an expiration. 

That might take some time. 

You might see how banks will take a property by foreclosure, it’ll sit in their REO portfolio for months sometimes, and months and months and months before it goes on the market. In some cases, that’s a function of them waiting for a right of redemption to expire, because they don’t want to turn around and sell it to you and then have that defaulted borrower come in and exercise their right of redemption.

Why?

Because then you, Mr./Mrs. Investor are going to go to the bank and say, “Hey, that wasn’t disclosed,” and it becomes a whole big mess. 

Disclaimer: I’m not an attorney and I’m not here to render legal advice. I’m not an accountant, so I don’t offer accounting advice either. I speak just from a place of personal experience. 

Some states don’t have rights of redemption… 

There is no statutory right of redemption in the state of Florida or New York, and others, too.

Now, let me get back to our original, specific question: How do you work with the seller and foreclosure during their redemption period? 

Well, their redemption period begins after they’ve lost the house, after the sale takes place, the gavel comes down, bam. The redemption begins right then. 

So how do you deal with a seller who’s lost their house to foreclosure and is now in that period of redemption or right of redemption?

You’re going to want to check with the state laws first, but one strategy would be to acquire that right of redemption from the property owner who’s now lost their property, and then go and redeem it yourself. 

I think redemptions are interesting as long as you’re the redeemer and not the redeemee:

• If you’re the redeemee, you’re going to have a bad day. 
• If you’re the redeemer, well, you just potentially slapped the living crud out of somebody, assuming they paid more than the redemption amount or have more invested than the redemption amount (which, by the way, is one of the reasons why, again, at the risk of repeating myself, foreclosures take a long time in some states before they actually go to market). 

You could acquire that right of redemption from the borrower, potentially redeem it from the bank, and it would be like:

“Fine, have it. You just paid what we were owed, and you just took it off our books and saved us the trouble of insuring it, managing it, and eventually getting it sold, maybe potentially at a loss. Thank you very much. We appreciate you very much.”

When the property sells at a foreclosure or tax auction — not to the lender — for more than the upset amount, and there’s a right of redemption in their state, that person puts themselves in jeopardy. 

I would take a hard look at that to see if it’s even a thing in the state where you are or plan to do business. I’d talk to a real estate attorney about it there in that state to really, really get the ins and outs of it.

Hope that helps,
Cam