In the United States, homeowners in roughly half of the 50 states have a statutory right of redemption. This means that a law allows individuals who did nothing to stop foreclosure on their homes one last chance to get back their property. Depending on state law, the redemption period terminates before the foreclosure auction or can last several months or up to one year after the property has been auctioned for the unpaid mortgage balance and accrued interest. During the redemption period, the owner can stay in the home without fear of eviction, and often does so without paying anything during the occupancy.
Uncertainty for Successful Foreclosure Auction Bidder
The statutory right of redemption can wreak havoc with the plans of a real estate investor who is the successful bidder at a foreclosure auction. Not only is the investor barred from evicting the former owner during the redemption period, depending on state law, the investor may not receive title to the property until the end of the redemption period. Without title, the investor cannot put the property on the market or obtain lender financing to fix up the property. Even if the law allows title to pass to the success bidder, the former owner may get back the property by paying the investor the full amount of the bid plus any costs incurred in the auction process.
Investors should beware of the savvy homeowner. A foreclosure wipes out most secondary liens on a property; a homeowner who knows this may choose to wait to redeem the property after foreclosure instead of trying to stop the foreclosure and being obliged to pay all of the creditors who have liens on the property.
Novice real estate investors may fail to understand the uncertainty caused by the statutory right of redemption. They may spend time and money on repairs only to lose a property to the former owner who somehow finds the funds to redeem it- or to another investor who bought the right of redemption from the former owner (see below).
Buying the Right of Redemption
Many investors in states that provide a statutory right of redemption find it advantageous to buy the right from a homeowner, either after or instead of buying a property at a foreclosure auction. The ability to do this depends on whether state law allows the homeowner to sell or assign the right of redemption. Thus, the investor may convince a homeowner to accept a few thousand dollars in exchange for leaving the property and surrendering the right to redeem it.
Finding Properties in the Redemption Period
Investors can readily determine which properties in a given area are in the redemption phase. Investors can review the public records at the courthouse where the foreclosure auctions take place and calculate the termination of the redemption period. Alternatively, investors can read the legal notices of foreclosure sales in the local newspapers or subscribe to services that provide listings of properties that are set for auction on specific dates.