All You Need to Know About Redemption Deeds
Redemption deeds are a mixture of the tax liens and tax deeds, put it simply, redemption deeds are tax deeds with a redemption period.
As an investor, you’re buying a real property, but with the caveat that the property owner gets one more chance to redeem, or buy the property back. The good news is that the property owner is penalized deeply for it. Interest rates tend to be very high for redemption deeds. How high it could get? How about something like 100%? Will you be happy with that for a redemption period like 2 years?
Redemption Deeds Process
The process starts when the property owner fails to pay the property tax to the county. Instead of issuing a tax lien certificate and selling it to investors, the county immediately offers the redemption deed for sale to investors.
The county will announce the sale and investors will come to bid on redemption deed properties (note, not tax liens, but tax deeds). 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.
How High Redemption Deed Interest Rates Could Be?
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.
We will use Texas, the hot redemption deed state to illustrate.
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. Why?
Because 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 (such as improved lots, vacant land, raw land, etc.), then the redemption period length is only six months. On that investment you'll make a 25% penalty or you take immediate ownership after six months. Either way, you will be a happy investor, won't you?
One caution about redemption deeds: when you call the county officers, 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 come up with it. They may just refer to them as tax deeds or simply use the term tax sales.
One final note, sometimes the county doesn't handle the auction but they will outsource operations, announcements, and management to another company, such as a law firm. Check out our list of hot redemption deed states.