Any reasonable person would assume that when he buys a property at a foreclosure sale, it's automatically his property, but that's not always the case. Many areas of the country have a mandatory redemption period, which can last from a few months to an entire year. Check out the appendix at the back of this book to find out about the redemption period in your area.
During the redemption period, the person who purchased the property at the sale gets to insure the property and pay the property taxes, but the foreclosed-upon homeowners have the right to redeem the property. To do so, the homeowners have to come up with enough cash to pay off the mortgage in full along with any interest and penalties.
Depending on the rules that govern redemption in your area, the buyer may or may not have the right to recover expenses (including property taxes and insurance) from the homeowners. Consult your real estate attorney.
If you purchase a property at a foreclosure sale in an area that has a mandatory redemption period, about 50 percent of the time you end up with the property. The only sure way you end up with the property is in markets that don't have redemption periods. (Check out the appendix at the back of the book to determine whether your state has a mandatory redemption period.) To protect your investment in areas that have a redemption period, take the following precautions:
i If possible, repair any defects in the house that may be considered unsafe or lead to further deterioration of the property. If the property is vacant and unsafe, and you don't take care of the problem immediately, the property is likely to lose value. Avoid investing any more money in repairs than is absolutely necessary — if someone redeems the property, you stand to lose that money.
i Insure the house, and file an affidavit of payment, so if the homeowners redeem the property, you may be able to recoup your expenses. Consult your real estate attorney to determine your rights to recover expenses.
i Pay the property taxes, and file an affidavit proving payment.
i Don't invest in any renovations, just in case the homeowners do redeem the property. You could lose all the money you invested in the renovations. Generally you perform repairs only to protect your investment if the house is vacant or if you've worked it out with the occupant. Different states may have different abandonment laws which may restrict you from doing anything. Your real estate attorney can provide guidance here.
i Keep an eye on the property to protect it from vandalism and theft. Some disgruntled homeowners may strip the property before vacating it.
For additional advice on how to survive the redemption period, see Chapter 16.
All sales are not final in areas with redemption periods. If you miss out on an opportunity during the foreclosure sale, you haven't necessarily lost the property for good. The homeowners still control the property, and you can work with them to bump the investor who purchased the property out of the deal. See Chapter 11 for details. Of course, the knife cuts both ways — you could end up getting bumped. You get your money back, but you lose out on the property.
I bought a first mortgage (senior lien) at the first foreclosure sale on a property for $25,000. Another investor bought the second mortgage (junior lien) for $25,000. Thinking that he had the property in the bag, he spent another $25,000 during the redemption period renovating the house, so now he had $50,000 invested in a property that was worth about $100,000.
Sounds like a good deal, but the investor made a huge mistake — he failed to pay off the senior lien, which I held. He could have redeemed the $25,000 senior lien that I held, sold the property for $100,000, and made a $25,000 profit, but he forgot to redeem the senior lien.
I took possession of the house and put it up for sale. The other investor called all upset because he was convinced that the house was his. I had to explain that due to his oversight, the house was not, in fact, his, but mine.
The moral of the story is that if you buy a junior lien attempting to control the senior lien, remember to redeem that senior lien.
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