Introduction to Redeemable Deed Investing
There are variety of ways investors generate profits by purchasing legal documents related to delinquent property taxes.
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.
Or, 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 and What Purpose do They Serve?
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 a tax deed (or redeemable 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.
What States Offer Redeemable Deeds?
Redeemable deeds are only offered by a handful of states as a majority of tax sales are either classified as tax lien or tax deed sales.
How do Redeemable Deed Auctions Work?
The winner of the redeemable deed 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 once the redemption period is complete. This allows investors the potential opportunity to 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, the original owner get to keep their property. When this happens, the original property owner has to repay the full amount that the winner of the auction paid plus any interest or penalties accrued during the redemption period.
That investor is also entitled to pocket the penalties, fees, and interest that the original owner owed and ultimately repaid helping to de-risk the overall investment.
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. Some example redeemable deed 1 year penalties and returns are as follows:
- 25% Penalty in Texas
- 20% Penalty in Georgia
- 15% Penalty in Delaware
- 12% Return in South Carolina
- 12% Return in Hawaii
- 10% Return in Tennessee
That potential return is what keeps investors coming back and continually interested in the redeemable deed investing space.
Timelines for a Redeemable Deed Redemption Period
While the redemption period on a redeemable deed varies per state, we wanted to quickly profile a couple of different scenarios and what you may expect as you navigate the process.
In Georgia for example, the redemption deed timeline may take up to 18 months before getting a marketable title deed.
For starters, the Georgia redemption period is technically one year and a day. After the redemption period you will start the barment process, and ultimately the quiet title process.
Finally at the end of those steps you will have a marketable title deed that you could sell on the MLS.
In Texas on the other hand, the redemption period is 6 months.
But if its a homestead property the redemption period may be 2 years.
So if you are researching redeemable deed auction properties without the right data, it may throw you for an unintended loop and cause some investing cashflow timing issues.
To ensure you are using the best tools for the job check out our Research platform which is designed to make your tax sale investing a breeze.
If you are just getting started we recommend you discuss this process with a tax sale attorney that specializes in the state specific process to ensure you know what exactly to expect. At the bottom the Georgia and Texas state pages we have some attorney contact info should you need it.
Bonuses of Investing in a Redeemable Deed States
While investing in redeemable tax deed states you can get the benefits of tax liens or tax deed states depending on your investment model.
To get the benefit of the high interest rate or penalty (i.e. - tax lien benefits) you would likely want to target really nice properties that will likely redeem before the end of the redemption period. This allows you to earn a high rate of interest without having to go head to head with the institutional investors in the lien space.
On the flip side, you can treat a redeemable deed auction just like a normal tax deed auction with a goal of ultimately owning the piece of real estate. If owning the real estate is your ultimate goal you could focus on cheaper properties as those are less likely to redeem during the redemption period.
Auction Competition Level In Redeemable Deed States
Competition is still very present in redeemable deed states, but there are some ways to avoid the most sophisticated investors.
First, just by choosing redeemable deed investing instead of tax lien investing you have less competition.
Lien investing is the most competitive due to the amount of institutional money that is available. Institutional investors have access to traditional bank financing, so competing as a small investor can be an overwhelming proposition.
Some other methods to avoid the high level of auction competition is to focus on live auctions that are removed from major metro areas.
How Can I Finance a Redeemable Deed?
Your financing opportunities for a redeemable deed has historically been very limited.
Typically you would either need to use your own money, or you would have to raise external investor capital.
Recently, however, Tax Sale Resources launched the financing program which allows you, the investor, to finance your entire redeemable deed so you can focus on finding your next deal and growing your portfolio.
The Tax Sale Resources financing program works especially well in redeemable deed states as the investor would be covered in the event of a redemption or in the event that they ended up owning the tax deed after the redemption period.
To learn more about the financing program, Brian the Tax Sale Resources Founder has a great interview on the topic, or you can check out the financing page and request more information.
Things to Keep in Mind Before Investing in Redeemable Deeds
Investing in redeemable deeds has risk just like any other investment, and its important to know where these roadblocks may appear.
As you are evaluating the viability of a state or a redeemable deed tax sale its import to remember the following:
- Talk to an attorney that specializes in the states tax sale proceedings
- Redemption periods vary significantly from one state to another from weeks, months, or even years
- Don't "bank" on a property redeeming, so if you bid on a property make sure you are ok with owning the underlying real estate
- Be patient and comfortable in limbo. The property owner can redeem the property at anytime throughout the redemption period, and there is no way of knowing what the outcome may be until the end of the period or until the property owner redeems the property
- There may be different rules by jurisdiction, so before attending a new redeemable deed tax sale be sure to call the county to educate yourself as much a possible
- Properly underwrite each individual property
The Bottom Line of Redeemable Deed Investing
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 for more content to assist in your tax sale investing journey. If you are ready to get started researching where the next sale opportunities are get started with Research today!