The Profit Potential of Redeemable Deed Investing
There are a variety of ways investors generate profits by purchasing legal documents related to delinquent property taxes. One way is by buying a government’s tax lien, and another is by buying a tax deed. (To learn more about those, check out our other blogs that focus on each of those respective investment strategies.) A third way is through what is known as a “redeemable deed.”
They are Also Referred to as Hybrid Investments
These are often called a hybrid investment, because they have some traits similar to a tax lien and other traits similar to a tax deed. Basically, that means the investor who owns the redeemable deed could earn a very attractive interest rate – like what investors strive to do with a tax lien. On the other hand, they could wind up as the legitimate owner of the property itself – which is one of the primary goals of a tax deed investor. Understanding the basics of how a redeemable deed works in this hybrid middle ground is the first step toward adding this unique opportunity to your investor toolkit.
What is a Redeemable Deed?
Each local municipality needs to collect tax dollars in order to function and provide public services to the community. When a property owner doesn’t pay their property taxes, they are declared officially in default. Depending on what city, county, or state jurisdiction the property is located within, the government then has legal options to help recoup those financial losses. In many cases, the government entity will auction off what is known as a tax deed to the highest bidder. But there is a window of time – and this time frame varies from state to state– when the owner can still retain their property by paying off what they owe. That is known as the redemption period. In the case of redeemable deeds, this redemption period is considerably shorter than a tax lien redemption period. That’s why these are called redeemable deeds.
How it Works
The winner of the auction becomes the owner of that tax deed. If the delinquent taxpayer still never pays what they owe – including penalties and interest – the new owner of that deed can claim the property as their own. That’s a huge incentive for investors, who may wind up getting a valuable property at a very deep discount. If the original owner does, however, repay what is owned during the redemption period, they get to keep their property. But in many cases, they also have to repay the full amount that the winner of the auction paid, so that the investor who bought the redeemable deed gets their money back. That investor is also entitled to pocket the penalties, fees, and interest that the original owner owed and ultimately repaid. The interest charged on redeemable deeds is typically many times higher than you might otherwise earn through such things as a savings account or bank certificate of deposit. That potential to get paid high interest is the other financial incentive for buying a redeemable deed at auction.
Why It’s Called a Hybrid Tax Deed Investment
However, the rules governing the length of the redemption period vary significantly from one state to another and can be weeks, months, or even years. During that time, the person who bought the redeemable deed at the auction can earn income from the interest, penalties, and fees that the taxpayer owes and agrees to repay. Or they might not repay what they owe, which will eventually lead to missing the redemption period window of opportunity. In that case, the property can end up being owned by the holder of the redemption deed who bought it at auction. But until the redemption period passes, the investor cannot have any way of knowing whether that outcome will happen or not.
Different Rules, Different Jurisdictions
Delinquent taxpayers are often required to reimburse not just their unpaid taxes with interest and fees, but also the amount the redeemable deed was sold for at auction. Since they couldn’t even pay the taxes, it’s unlikely they can additionally reimburse the amount the auction generated. But it is very important to know that the rules about redeemable deeds vary considerably from state to state. Some places don’t even offer redeemable deeds, and in every state that does allow them the guidelines and interest rates paid to the investor are different. For these reasons, it is critical that before bidding for a redeemable deed you do your research to learn as much as possible about the rules, the value of the underlying property, the redemption period, the interest rate you may receive, and other pertinent details.
The Bottom Line
Investing in redeemable deeds can be a very profitable enterprise for those who understand how they work and what rules and regulations apply based on each specific jurisdiction. The key is to do your homework, know how much you can afford to invest, and rely on as much expert insight and advice as you can. For those who follow those crucial tips, redeemable deeds have the potential to be a worthy investment in virtually any economic cycle.
To learn more about the other forms of investing, check out our blog about tax liens and the other about tax deeds. If you are ready to get started researching where the next sale opportunities are in the country, get started with Research today!