The Real Story…
News and commentary about the real estate market and related topics.
Dave Parrish, ABR ®, CRSA, CSP, GRI, ePRO ®, REALTOR ®, RealtySouth
The opinions expressed here are my own and don’t necessarily represent those of HomeServices South.
The Right of Redemption…
Redemption is a good thing! Right? Aren’t you glad to live in a state that believes in redemption and extending it as a right to its citizenry? Actually, I am very proud to live in one of the two states that provide the most extensive Right of Redemption policies in the USA. Yes, Alabama is number 1 in another positive category…
Alabama and Kansas provide a 12 month period for a homeowner to redeem their property following losing it in a foreclosure proceeding…the longest redemption periods in the nation. Next closest would be Michigan, Minnesota, Iowa and South Dakota each of which allow a six months Right of Redemption. Forty of the states provide no redemption period.
So what exactly is the Right of Redemption, how does it work and how does a home purchaser of a foreclosed property deal with it.
A right of redemption after foreclosure sale, allows the borrower who just lost their home at the foreclosure auction, the opportunity to buy it back from the bank (or winning bidder), usually at the same price as the highest bid at the trustee sale. This is allowed in some states and for a specific amount of time after the trustee/foreclosure sale (weeks to many months). This is a disadvantage for bidders and lenders, as property “improvement” costs will not be recouped if the previous homeowner exercises this right.
In Alabama the Right of Redemption process does provide some protections to the intermediate owner, that is the bank or winning bidder, and others who purchase the property prior to the Redemption period’s expiration. While improvement costs are not included in the amount the former homeowner must repay, repair costs are included plus an added fee equal to 12% per annum interest. In addition the previous homeowner must make whole all in the chain of possession to reinstate their position. This would include past due payments including interest, cost to foreclose and all associated fees incurred during the foreclosure process. Note these costs can be substantial.
All of this may be made more complicated by the fact that a homeowner may sell his redemption rights, say to an investor who chooses to redeem the property. Additionally, there may be factors which cause an extension to the Right of Redemption.
As you can see, the Right of Redemption is not a gift… simply an opportunity for the previous homeowner to make right a problem that they encountered. In practice, the Right of Redemption is rarely exercised… except in cases where the property has some sentimental value or the previous homeowner had a large equity position (one that exceeds the net costs to redeem). In today’s declining markets where many homeowners may owe more on their homes than the current market value, redemption makes no financial sense for many if not most experiencing foreclosure.
Not al distressed property sales include a Right of Redemption. When a homeowner does a deed-in-lieu of foreclosure, they relinquish Right of Redemption as there was no foreclosure. Likewise, the bank may do a cash-for-keys offer with the homeowner in which they would include the relinquishment of the redemption rights. Short sales, another alternative for troubled home owners, do not include the provision of a redemption period, as no foreclosure took place.
As to the home purchaser of a property with an unexpired Right of Redemption, it is important to remember that improvement costs are not covered in the monies reimbursed. For example replacing damaged kitchen counters would be covered so long as the replacement is typical for like properties in the neighborhood. Replacing laminate counter tops with granite could be considered an improvement, if granite/solid surface countertops are not “normal” in the neighborhood for similar properties. So be careful of those upgrades… only address the really needed repairs prior to the expiration of the redemption period.
As I mentioned last week, Fannie Mae just enacted new rules making properties with unexpired Rights of Redemption ineligible as properties with unacceptable title defects, which could be problematic. However, other financing options should be available.
In the past, Sellers have been quick to disclose that the Right of Redemption may apply to a property. Going forward, we could see a disclosure of the Right of Redemption period expiration date.
Now in closing, let me remind you: I am not an attorney and do not represent this description as a substitute for legal advice.
Until next week… May the market be with you.
