One of my favorite investment vehicles within the arena of property tax related investments is the redeemable deed. In my view, a redeemable deed offers the best features of a tax lien and a tax deed.
A redeemable deed is similar to a property tax lien in many regards. They have a redemption period, which is a grace period in which the property owner can pay their taxes and retain ownership of their property.
The redemption period on redeemable deeds varies by state and is set by state statute. They also offer an interest rate or penalty that is payable to the investor if the property owner chooses to redeem during the redemption period just like a tax lien.
So what makes a redeemable deed different than a tax lien?
The major difference between a redeemable deed and a tax lien certificate is that the investor actually receives a deed to the property. However the investor does not receive full property ownership rights to the property with the exception of Texas.
When an investor purchases a tax lien certificate they do not receive a deed to the property, they receive a first position lien on the property. In the rare case that a property owner fails to redeem a tax lien on their property the investor holding the tax lien certificate must go through the process of foreclosure to obtain a deed to the property. The investor that holds a redeemable deed on a property does not have to go through the formal foreclosure process to obtain a deed to the property if the property owner fails to redeem the property.
Instead the redeemable deed holder need only follow a few procedural steps to bar the property owner from the right to redeem forever. This process is called a judgment in REM. Just like any tax deed if the investor chooses to sell the property he/ she will want to clean up any clouds on title by instigating a quiet title action or having the title certified so that they can pass clear title to a subsequent property owner.