What Is a Redeemable Tax Deed?
A redeemable tax deed is something in between a tax lien and tax deed. When you go to a redeemable tax deed sale, you are actually purchasing the deed to the property. If you are the successful bidder, you will receive a tax deed to the property. That deed, however, is encumbered for a period of time known as the redemption period (not to be confused with the redemption period for tax liens). The owner can redeem the property by paying the amount that was bid for the deed at the tax sale plus a hefty penalty. If the deed is not redeemed during the redemption period then the previous owner is barred from redeeming the property and the tax deed holder is the owner of record and the legal owner of the property.
Which is Better, Redeemable Deeds or Tax Liens?
A redeemable tax deed is very similar to tax liens, but there are some important differences that I believe make redeemable tax deeds a better deal for the investor. I will point out that every redeemable state treats these deeds differently. In some states, like Texas for example, when you purchase a redeemable deed you are considered the legal owner of the property and can evict anyone who may be in the property once you record the deed. The previous owner has redemption rights, but is no longer considered the rightful owner of the property. But in Georgia, which is another popular redeemable deed state, when you purchase a deed you are not the legal owner of the property until the redemption period is over and you foreclose on the property. In Georgia you must foreclose the redeemable deed much like you would a lien in order to take ownership of the property.
But in both states and in most other redeemable deed states, in order to redeem the deed, the owner must pay the investor what they bid at the tax sale plus a hefty penalty, not interest. What this means is that if you purchase a redeemable tax deed and it redeems a few days after you record the deed you still get the full penalty amount. You make the same interest on your money if it redeems in 2 weeks or 2 years. A penalty is not annualized like an interest payment would be.
How it Works in Georgia
This also makes it more difficult for the original property owner to redeem the tax deed. Even though they are entitled to use the tax sale overage to redeem, they still have to come with the original minimum bid amount plus the interest on the entire amount that was bid. Let’s say for example, that you went to a tax sale in Georgia and the minimum bid was $5,000, but you were the winning bidder at $20,000 on a property worth $80,000. The property owner would have to come with $5,000 plus a 20% on the entire $20,000 that you paid – $9,000 total. Which added to the overage of 15,000, would be a total redemption amount of $24,000, if the deed was redeemed within the redemption period (one year).
So even if the lien is redeemed just a couple of weeks after you purchased it, you still make 20% on your money (in this case $4,000) and the property owner has to come up with the original $5,000 that they owed plus another $4,000 – almost twice the original amount that they owed for the property. It is more difficult for a property owner to redeem a deed than it is for a someone to redeem a tax lien. There are actually 2 advantages to investing in a redeemable tax deed over a tax lien. One is that the rate of return is higher than in most tax lien states and the second is that you have more of a chance of foreclosing on the property with a redeemable tax deed than with a tax lien.
There is one drawback to redeemable deeds though. You typically need more money to purchase a redeemable deed than you do to purchase a tax lien. This is because while in many lien states the interest rate is bid down, in most redeemable deed states the price of the lien is bid up. And since you are bidding for the actual deed to the property, the price of the deed can be bid up rather high.
More Information
For more information about redeemable tax deeds in Georgia, watch the webinar replay with Charles Sells of Platinum Investment Properties – West that was on Wednesday June 15. You can watch the recording at: http://taxlienlady.com/PIPWest-Jun2011/PIPWest-Jun2011.html.
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