People whose property is in foreclosure have the right to pay off back taxes or liens against the property to prevent it from going into foreclosure or being auctioned off. Every state gives property owners this right. However, the redemption period—the amount of time people whose property is in foreclosure have in which to pay off their debt and redeem the property—may differ from one state to the next. In some states, property may be redeemed even after an auction or foreclosure sale.
A right of redemption bond protects a party that purchases a property through a foreclosure sale or auction in the event that the original owner exercises the right to redeem the property by paying off their debt after the sale.
Who Needs It?
People who buy properties in foreclosure should know about the right of redemption. However, such properties are often bought with the intent to “fix and flip” it. A right of redemption bond protects the party that purchases the property from the “flipper.” Without a right of redemption bond, it’s unlikely that any lender will approve a mortgage on the property within the period of redemption.
How Does It Work?
In the bond contract, the obligee is the mortgage company lending money for the purchase of the property from the flipper. The seller of that property (the flipper) is the principal required to obtain the bond. The company underwriting and issuing the bond is the surety. The purchaser of the property is not a party to the bond.
In the event that the original owner exercises the right of redemption and pays off their debt, the mortgage company has a valid claim on the bond and the current buyer is relieved of any responsibility for the mortgage debt. The surety will pay off the mortgage, and the principal—the seller, or “flipper”—must reimburse the surety.
What Does It Cost?
The required amount of a right of redemption bond is established by the obligee and is typically in the full amount of the mortgage. The principal’s cost to obtain the bond is typically a relatively small percentage of the required bond amount. That percentage, known as the premium rate, is based on the surety’s evaluation of the principal’s ability to reimburse the surety for any amount paid out on a claim.
The right of redemption is a complicated legal concept, and the financial stakes can be high. You can rely on our seasoned surety bond professionals to help you get a right of redemption bond that meets your needs.
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