You might know that when you purchase a tax lien you are not buying the property, but paying the delinquent taxes, and putting a lien on the property. And if the property owner doesn’t pay the amount of the lien plus interest and penalties, in a given amount of time (the redemption period) you will be able to foreclose on the property. You might also know that when you purchase a tax deed, you are buying the property. But do you understand what a redeemable tax deed is?
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 or interest. 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 could make a redeemable tax deed a better deal for the investor. Every redeemable state treats these deeds differently, however.
In Texas for example, when you purchase a redeemable deed you are considered the legal owner of the property. You 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.
In Georgia, which is another popular redeemable deed state, when you purchase a deed you are not the legal owner of the property. Once the redemption period is over and you can 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.
In both Georgia and Texas, 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. This means 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.
What are the Drawbacks to Investing in Redeemable Deeds?
One drawback to investing in redeemable deeds is that there are only 7 states, and one city, that sell them. The 7 states (and one city) that do sell redeemable tax deeds are Connecticut, Delaware, Georgia, Hawaii, South Carolina, Tennessee, Texas, and Philadelphia, PA. another drawback to investing in redeemable deeds is that of the 7 states and 1 city that have redeemable deed sales, only 1 county conducts an online tax sale. All the other redeemable deed sales are conducted as live auctions and you have show up in order to bid. Only Shelby County Tennessee conducts their tax sale online.