Foreclosure Redemption Question

[Lee Allen]

Does anyone have any experience with foreclosure redemption? I have an opportunity where a house went to foreclosure after the owner died and the children didn't do anything with the property. There was only $70K owed on the mortgage and an investor bought it at auction for $130k and did about $70k of work to it and is now selling the property for $330K. In my state judges will allow the investor to recover what they paid for the house and the repairs but won't allow the investor to make his $130k of profit. Also, judges won't allow for unnecessary things like landscaping, pools, hot tubs, etc.

The owners have been approached by other investors to buy their redemption rights for $20k. The guy who bought the property said that he doesn't believe that redemption rights can be sold to other investors and that the owners couldn't get a loan and is unwilling to give the previous owners anything.

If the owners can't assign their redemption rights I know I know that the owners can easily bring in a cash buyer that will be their financing partner, redeem the property for $200K and then sign over the property for $20K.

[Hal Thompson]

I have experience with redemption law in other states, but not Alabama. https://www.alllaw.com/articles/nolo/foreclosure/laws-in-alabama.html

First, let's be clear about our terms. Most states recognize an "equity of redemption". Meaning that when you have defaulted on your note, you are given a statutory period to make up your payments and bring the loan current. This always happens before any kind of foreclosure sale.

Then, there is the statutory right of redemption. This is a post-foreclosure right to pay back the purchaser, plus usually some interest, and to retake title to the property after a foreclosure sale. This is generally the redemption right that most people are referring to when they discuss redemption rights vis-a-vis foreclosure.

It looks like Alabama updated their redemption laws recently:

http://alisondb.legislature.state.al.us/ALISON/SearchableInstruments/2018RS/PrintFiles/HB90-int.pdf

As in most redemption scenarios, the most junior lienors are able to redeem from the most senior, but must pay the debts of the most senior in order to redeem.

In Alabama, it appears that a transfer of the right of redemption also effectuates the transfer of the interests of the party (the naked right of redemption cannot be separated from the underlying interest): 

(5) Any transferee of the interests of the debtor or mortgagor, either before or after the sale. A transfer of any kind made by the debtor or mortgagor will accomplish a transfer of the interests of that party.

This is very complicated stuff. If you don't have experience with it, it will be best for you to get a lawyer to help you navigate the waters. There are lots of gotchas with redemption law (for example, I've seen people hold property during a redemption period and improve it to the tune of $250k, not knowing that they will not recover the money for those improvements if the property is redeemed). It's a good idea to get a property lawyer for these kinds of transactions.