Foreclosure Redemption Question

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Does anyone have any experience with foreclosure redemption? I have an opportunity where a house went to foreclosure after the owner died and the children didn't do anything with the property. There was only $70K owed on the mortgage and an investor bought it at auction for $130k and did about $70k of work to it and is now selling the property for $330K. In my state judges will allow the investor to recover what they paid for the house and the repairs but won't allow the investor to make his $130k of profit. Also, judges won't allow for unnecessary things like landscaping, pools, hot tubs, etc.

The owners have been approached by other investors to buy their redemption rights for $20k. The guy who bought the property said that he doesn't believe that redemption rights can be sold to other investors and that the owners couldn't get a loan and is unwilling to give the previous owners anything.

If the owners can't assign their redemption rights I know I know that the owners can easily bring in a cash buyer that will be their financing partner, redeem the property for $200K and then sign over the property for $20K.

I have experience with redemption law in other states, but not Alabama.

First, let's be clear about our terms. Most states recognize an "equity of redemption". Meaning that when you have defaulted on your note, you are given a statutory period to make up your payments and bring the loan current. This always happens before any kind of foreclosure sale.

Then, there is the statutory right of redemption. This is a post-foreclosure right to pay back the purchaser, plus usually some interest, and to retake title to the property after a foreclosure sale. This is generally the redemption right that most people are referring to when they discuss redemption rights vis-a-vis foreclosure.

It looks like Alabama updated their redemption laws recently:

As in most redemption scenarios, the most junior lienors are able to redeem from the most senior, but must pay the debts of the most senior in order to redeem.

In Alabama, it appears that a transfer of the right of redemption also effectuates the transfer of the interests of the party (the naked right of redemption cannot be separated from the underlying interest): 

(5) Any transferee of the interests of the debtor or mortgagor, either before or after the sale. A transfer of any kind made by the debtor or mortgagor will accomplish a transfer of the interests of that party.

This is very complicated stuff. If you don't have experience with it, it will be best for you to get a lawyer to help you navigate the waters. There are lots of gotchas with redemption law (for example, I've seen people hold property during a redemption period and improve it to the tune of $250k, not knowing that they will not recover the money for those improvements if the property is redeemed). It's a good idea to get a property lawyer for these kinds of transactions.

@Hal Thompson   in Oregon if you improve a property and the owner redeems your out to luck.

the only thing that your allowed to do is protect the asset.. IE if roof is leaking fix it that type of thing.

in practice very few redemptions are made by the owner who lost the property I only know of one personally and i suspect there are not more than a hand ful in this state.

when i was buying a lot of property in Bham.. we could buy redemption right title insurance.

Most mortgages require a foreclosure redemption bond on properties that are still in the redemption period. I learned the foreclosure redemption bond is a surety bond. What a surety bond does is insure the title and bank but not the investor that bought the property or the at the foreclosure sale nor does it cover the person the bought the property from the investor. They basically make the investor indemnify them for any losses they take. So if the investor sold the house for $300K and the courts ruled that the property and repairs could be redeemed for $200K the surety bond steps in and pays $100K to make the bank whole on its loan. They then go after the investor for $100K and they will sue and get a judgment against the investor if he doesn't pay up. Once they get a judgment it causes a lien on all the investor's properties that is in his name plus it can go on his personal credit report if he bought the property in his name and not an LLC.

The majority of foreclosed properties are never redeemed.

In Alabama, there are multiple people who can redeem the property. The property owner and even their spouse have the rights, any junior lien holder, The IRS, children, and heirs of a deceased owner. If two parties try to redeem the property the mortgagor and debtor have first priority for redeeming the property.

After a lender foreclosure in Alabama, the borrower can redeem for up to 180 days afterwards (depending on date of origination and homestead exemption or not) or up to one year for all other properties. Redemption rights can be lost if the investor makes the 10 day demand for possession and the borrower does not vacate in that time period.

Redemption rights are personal rights, sold via an assignment. They are freely assignable after the foreclosure. They cannot be purchased before the foreclosure because they do not yet exist at that point.

Post-foreclosure redemption charges include all of the following, all at 7.5% per annum interest

  • auction bid price
  • VALUE of any improvements or repairs made to the property after the foreclosure
  • Cost of casualty insurance premiums
  • Full post-foreclosure balance due on the promissory note that gave rise to the foreclosure, but only if the owner of the real estate also owns (or has been assigned) the promissory note
  • The full face amount of any other judgments or liens against the property now owned by the investor.

If the owner redeems, or someone who has been assigned the owner's rights, then all pre-auction liens against the property are revived.

We were accidentally involved in something like what you describe:

Because of our other properties in the neighborhood, we were approached by Investor X who offered to sell us a property that he bought through the foreclosure auction (or so we assumed). It met our criteria perfectly, so we bought it, tore the house down, and started redevelopment. 

Fast forward to Thanksgiving that year. I was talking with my uncle, who is also a RE investor in the same town, and I mentioned our new project. Turns out, HE bought that property at the auction, but after the auction, Investor X went to the former owner and bought the redemption rights. Investor X showed up on my uncle's doorstep and introduced himself as the new owner of the property my uncle thought was his. Then, of course, he sold it to us. We all had a laugh, and fortunately there were no hard feelings. 

Moral of the story is, if you buy a property at auction, make sure you also buy the redemption rights!

It is almost impossible to buy all the redemption rights to a property. Every junior lien holder has a right of redemption. Every owner also has a redemption right and if they were married the person that they married to also has a right of redemption. In the case of the death of the owner then all heirs of the estate and the executor of the state also have a right of redemption and the IRS can have a right of redemption if the owner owed taxes.

There is also a certain priority given if two people try to redeem the property. Owners and Mortgagers have the highest right of redemption then followed by heirs and lastly followed by junior lien holders.

In the vast majority of foreclosures probably around 99%, there is never a redemption because there was no equity in the property. The few that do redeem are usually an investor that has money and there is a sizable amount of equity in the property.