If a property is taken through foreclosure, whether that be a mortgage foreclosure, tax lien foreclosure, or tax deed, there may be an applicable redemption period, or a period of time in which the property can be redeemed by an interested party after the sale. Redemption periods vary from state to state, meaning it's important for both real estate investors and property owners to understand how they could be impacted. In this piece we'll explore what a redemption period is and how it works in real estate.
What is a redemption period?
If a borrower or homeowner fails to pay their mortgage or property taxes, the local tax collector or lender has the right to pursue legal action against the borrower to reclaim the money owed to them. With delinquent property taxes, this is done through a tax lien foreclosure or tax deed sale. For a delinquent mortgage, it's done through a mortgage foreclosure.
The foreclosure process varies slightly for each but will eventually result in the property being either sold at a public auction or taken back by the lender or tax lien holder through foreclosure. In both events, the real property transfers to a new owner. However, in some states, there is a redemption period after the foreclosure sheriff's sale, which offers a right of redemption to the property owner or third party with vested interest in the property.
This redemption period is the specific period of time in which the foreclosed owner or other third party with vested interest, like a mortgage holder or junior lien holder, can redeem the foreclosure sale by paying the delinquent amount plus penalties and interest.
How do redemption periods work in real estate?
Not every state offers a redemption period. Statutory redemption, or the allowable grace period to repay the debt with interest and fees, is most commonly used in judicial foreclosure states, but the redemption grace period and whether it's provided will depend on the type of foreclosure sale.
For example, Georgia does not have a redemption period for foreclosure sales but does offer a 12-month redemption period after a tax sale. Other states like Michigan offer anywhere from six months to one year for both tax foreclosures and mortgage foreclosures. If a property is vacant, the redemption period can be shortened, and conversely, if the property owner has paid down a certain portion of the loan, typically two-thirds or more, they may be granted a longer redemption period. The longest redemption period for a mortgage foreclosure is one year. Tax foreclosures, including tax deed sales and tax lien foreclosures, can be redeemed over a longer period of time, as much as four years from the sale date.
Why would someone redeem a property?
If the home is going through foreclosure, it's unlikely the property owner has the money to pay the debt or they would have paid it prior to the foreclosure sale. However, there are some instances when the foreclosed owner is able to pay the outstanding debt after the sale because they gained access to a new source of money.
But in reality, the most common type of redemption is by third parties who carry an interest in the home. For example, a mortgagor who still has an outstanding mortgage surely doesn't want to lose the home through a tax sale. In the event the property does go to tax sale or tax lien foreclosure, they may have the ability to repay the outstanding tax amount with interest and fees. This allows them to regain title to continue with foreclosure proceedings if need be or recoup the debt paid for taxes in some other fashion.
It's also fairly common for a junior lienor, or a mortgage lender who is in second position behind the first mortgage holder, to execute their right of redemption, but this is typically done before the sale. For example, if the borrower is delinquent on their first mortgage and the lien holder is foreclosing, the junior lien holder can pay the outstanding amount in order to keep their security position in the property. This is usually only executed when the home has equity, because the redeeming junior lienor now has room to recoup their investment in the property through a sale after redemption and completing their foreclosure.
As you can see, redemption periods play a big role in distressed real estate sales. As a property owner or real estate investor, it's important to understand how a redemption period can impact you or the potential outcome of your investment. It's a good idea to speak with an attorney in the area who specializes in real estate foreclosure for further guidance on your local or state laws for right of redemption.