Redemption Right in Foreclosure Process
If you are investing in foreclosure properties, you need to know about redemption right of homeowner facing foreclosure. You may lose the foreclosure property that you bought if you do not pay attention to your state’s foreclosure practices in general, and loan documents in particular.
Foreclosure homes subject to redemption
Redemption is a major threat in buying properties foreclosed by banks and other lenders. As a foreclosure home buyer you are more or less protected depending on the state you live.
- States where there is no or less redemption risk: In states where “deed of trust” (sometimes called mortgage) prevails, your risk of facing redemption is none or small. Deed of trust has “power of sale” provision allowing the trustee (representative of the bank, title companies in many cases) to sell the property when homeowner defaults on mortgage loan. For instance, in California, “non-judicial foreclosure” cases constitute the majority (about 95 percent) of cases; the homeowner loses home in foreclosure and cannot exercise redemption right. Bank or lender cannot get deficiency judgment to recover the loan amount plus interest and expenses if they exceed the amount received after foreclosure sale.
- States where redemption risk is high: In states where “judicial foreclosure” is in place, bank or lender has to go to court to sell the property at foreclosure auction. If the amount of foreclosure sale proceeds does not cover the loan amount plus all interest and expenses, then bank obtains a deficiency judgment to recover any additional amount not received during foreclosure sale.
Caution: You need to find out whether the foreclosure property that you intend to buy is subject to judicial foreclosure or non-judicial foreclosure sale procedure even if you live in a state where judicial or non-judicial foreclosure is dominant. Some banks and lenders may not have a “power of sale” clause even if this makes foreclosure sale easier for them. In short, do not rely on general practice in your state and seek specific wording.
Beware of other foreclosure investors during redemption period
Right after you buy the foreclosed property, some sneaky foreclosure investors may convince the homeowner stating that you bought the property at significantly low price. If they succeed, homeowner may exercise redemption right to pay back the money that you paid for the property and repossess the foreclosure house.
- Relationship: You need to maintain good relationship with the homeowner who lost the property at foreclosure sale. Be gentle after the foreclosure sale for smooth eviction and relocation.
- Cash offer: Some foreclosure investors even offer cash for the keys and help homeowners renting a property to live in. Remember that your money is still at risk.
- Nonredemption certificate: Obtaining a non-redemption certificate is another option. However, the courts in some consumer friendly states may not accept it if court decides that foreclosure buyer took advantage of the homeowner under duress.
Many foreclosure home buyers prefer to stay away from the homeowner in the last one of redemption period.
Redemption right should not prevent you, an honest foreclosure investor from making lucrative deals
Here are the scenarios:
- You have no risk of redemption if you are living in a nonjudicial foreclosure state and the bank or lender has power of sale clause in loan documents and deed of trust. Your foreclosure house purchase is totally safe.
- Even if you live in a judicial foreclosure state, the foreclosure property that you plan to buy may be subject to non-judicial foreclosure process.
- Finally, even if you live in a judicial foreclosure state and the foreclosure home was subject to judicial foreclosure process, then the chances of being subject to redemption is not a major possibility as many homeowners move on to make a new start and do not have the time and money to exercise their redemption rights.
You may hear about another type of redemption. This one is related to federal (Internal Revenue Service - IRS) tax liens that has 120-day waiting or redemption period. Your foreclosure property title clears after this 120-day period. So, don't get surprised if your title insurance company excludes or waits for such redemption.