There are seven states that offer redeemable deeds to investors: Connecticut; Delaware; Georgia; Hawaii; Texas; Tennessee and Rhode Island.
Redemption deed investing is a combination of tax lien and tax deed investing.
These are tax deeds with a period of time where the owner can “redeem” or buy the property back their property. Unlike buy a tax lien certificate, you are buying real property. However with redemption deed investing the property owner gets one more chance to redeem. The good news is that the property owner is penalized deeply for redeeming. The Interest rates and penalties on the homeowner tend to be very high for redemption deeds.
Tax Lien Investing Review
Let’s review the entire tax lien process again. The property owner is responsible for some amount of money to be paid to the county in property taxes. Property taxes are the primary source of income for the county to support all of their departments and projects. When the property owner fails to pay their taxes, the county is left without needed money. Instead of issuing a tax lien certificate and selling it to investors, the county immediately offers the redemption deed for sale to investors. They announce the sale and investors come to bid on redemption deed properties. The winning bidder doesn’t walk away with a tax lien certificate with an interest rate, or a deed to the property with full control; the winning bidder walks away with the redemption deed that has a very high interest rate attached and the promise of property ownership if the property owner fails to pay the property taxes during the redemption period.
High Interest Rates
The advantages of a redemption deed to a tax lien certificate is that a redemption deed state usually promises higher interest rates like 24% and 25% and the promise of taking ownership at the end of the redemption period. It’s also much simpler to take ownership at the end of the redemption period. Let’s look at a redemption deed state example: Texas. Texas actually offers two redemption periods depending on the property type. For homestead properties, or properties with a home on it, the redemption period is two years; however, in this case, the longer the better. For the first six months of the redemption, there is a 25% penalty. That means that if the property owner redeems within the first week, the investor will still make 25%. After the first six months, you’ll make another 25% penalty making the total penalty for the first year 50%. If the property owner still doesn’t redeem after the first year, another 25% penalty is added on making the total potential return 75%. If the property owner never redeems, the property is all yours. If the property is non-homestead, then the redemption period length is only six months. Non-improved properties are improved lots, vacant land, raw land, etc. On that investment you’ll make a 25% penalty or you take immediate ownership after six months. It’s not hard to imagine why this strategy is getting popular, especially in Texas.
One more thing about redemption deeds; when you are speaking with the county, they may or may not know what you’re talking about if you call and say that you’re looking for redemption deeds. That is a descriptive term that we investors have came up with. They may just refer to them as tax deeds or simply use the term tax sales. Another note about auctions, sometimes the county doesn’t handle the auction but they will outsource operations, announcements, and management to another company; sometimes that is a law firm. The county will tell you whom to contact.
Hope this brief background on redemption deed investing helps!
As always, here’s to your success!
Creator of The Deed XChange™