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What Is A Redemption Period And How Does That Affect Me?

A redemption period is a very important detail to learn about in the world of tax lien certificate investing. Knowing what a redemption period is will help you to maximize your profits and to have a realistic view of what expenses each investment will entail.

When a county or municipality sells a tax lien certificate for a property because of delinquent taxes, the property owner is given a certain amount of time to pay off all the money that they owe the local government (taxes + interest + fees). This timeframe is called the “redemption period”, and is the period of time during which a property owner may “redeem” their property from the lien placed on it. The amount of time is set out in each state’s taxation code, and usually lasts from one to three years.

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How does knowing about redemption periods affect you? If you were to purchase a tax lien certificate from a county or municipality, the redemption period can mean a great deal. First, knowing how long the redemption period is will determine your probable return on investment (ROI) and second, it will help you to determine your plan of action. How so?

With each month and year that goes by and the property taxes continue unpaid, the holder of the tax lien certificate is entitled to receive a certain amount of interest when the homeowner finally pays off his delinquent taxes. In most states, the average interest paid to the investor is anywhere from 1-2% per month. So you can probably figure that the longer the redemption period lasts, the greater you’re ROI will be if the property is redeemed. And the opposite is also true: the shorter the redemption period lasts, the lower your ROI will be if the property is redeemed.

But knowing the length of the redemption period can also help you to determine your plan of action. For example, did you know that the holder of the tax lien certificate is required in most states to pay any new property taxes that may be due for the duration of the redemption period? When an investor purchases a tax lien certificate, he is paying the local government the money that they are owed. But until the property owner comes back into the picture, the government doesn’t want the property to become delinquent again, and so the responsibility falls to the investor to keep this from happening.

A long redemption period might mean that the investor will be expected to invest several hundred or a thousand or more dollars before seeing any sort of return on his investment. Of course, if the property owner redeems, the investor will be paid back with interest. And if there is no redemption, then the investor will receive a deed to the property. There is still the potential for a great return, but the length of the redemption period can affect how much money the investor will end up paying in the meantime.

Knowing the length of the redemption period in the state that you are investing in can make sure that you get the best return for your investment.

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