Let’s talk about redemption deed investing.
Redemption deeds are a hybrid of the two previous investment strategies, tax lien and tax deed investing. In essence, redemption deeds are tax deeds with a redemption period, or a time period where the property owner can essentially purchase the property back along with a penalty.
You’re buying a real property at the auction, but with the caveat, that the property owner gets one more chance to redeem. The good news is that the property owner is penalized deeply for it. Interest rates tend to be very high for redemption deeds.
Let’s briefly review the other two strategies. The property owner is responsible to pay property taxes to the county each year, and when they fail to pay their taxes on time, the county issues a government tax lien against the property and begins to charge fees and penalties to the property owner. This property tax money is vital for the survival of the county and county programs, so the county issues what’s called a tax lien certificate and sells it to investors, assigning the power and reward of the government tax lien to the investor. When the property owner eventually pays the property taxes plus interest and penalties, the county forwards that money to the tax lien certificate holder. If the property owner fails to pay the property taxes during a certain period of time, then the tax lien certificate holder has the option to take ownership of the property through the power of the government tax lien.
In tax deed states, instead of selling a certificate early in the process, the county holds the tax lien themselves and waits for the redemption of the property owner. If the property owner fails to pay during a certain period of time, then the county forecloses, takes ownership of the property, and sells the property at a public auction. Properties can be acquired at great discounts through this investment method.
Redemption deeds are somewhere in between with relatively few states using this method. Tennessee and Texas are a couple primary states where this strategy utilized.
Tennessee State Code § 67-5-2501 (2016): The right to redeem shall be exercised within the time period established by this subsection (a) beginning on the date of the entry of the order confirming the sale, but in no event shall the right to redeem be exercised more than one (1) year from that date… The interest shall be at the rate of twelve percent (12%) per annum, which shall begin to accrue on the date the purchaser pays the purchase price to the clerk and continuing until the motion to redeem is filed. If the entire amount owing is not timely paid to the clerk or if the motion to redeem is not timely filed, the redemption shall fail.
Texas State Code 34.21 c: [The property owner shall pay] …the amount the purchaser paid for the property, the amount of the fee for filing the purchaser’s deed for record, the amount paid by the purchaser as taxes, penalties, interest, and costs on the property, plus a redemption premium of 25 percent of the aggregate total if the property is redeemed in the first year of the redemption period or 50 percent of the aggregate total if the property is redeemed in the second year of the redemption period.
If the redemption fails, or the property owner never pays the delinquent taxes plus interest penalties accrued, which would be quite a large amount of money in a redemption deed state, then the tax deed is officially filed in the name of the investor.
In order to purchase a redemption deed, you are required to attend a live auction. Most are held at the county building, but some county auctions have become so popular that they are held at the local convention center. These auctions use a “premium bid” method to determine the winner of the redemption deed. The bidding starts at the total amount owed to the county including the delinquent taxes, interest, and fees, and then is bid up from there until no one is willing to bid higher. It’s crucial to have bid ceilings in place so that you do not bid away your potential returns. We will talk about this is our due diligence training videos.
It’s important to remember that the interest earned in these states is made on the total amount invested at the auction and not just on the delinquent tax amount.
Redemption deeds are a great opportunity for savvy investors. The barriers to entry are similar to tax deed investing in that you will likely need more money to get into a deal, and you will need real estate investment experience in order to execute an exit strategy; however, redemption deed investing offers large returns in interest penalties, if redeemed, otherwise the property is yours.
In our next video, we will discuss investor profiles.