Statutory Right of Redemption and the Selling Price of Foreclosed Houses

In some states properties are subject to a statutory right of redemption, which allows the previous homeowner and other parties to “redeem” the property for some designated period of time after the date of foreclosure. The statutory right of redemption exposes purchasers to the risk that they may lose their property ownership and may not be reimbursed for property improvements. This study examines a large sample of Alabama foreclosure transactions to determine the effect of the statutory right of redemption on the net selling price. The findings of a search of redeemed properties indicate that the actual number of property redemptions is quite small; however, the average economic loss is estimated to approach 40 %. Also, an examination of 1,860 foreclosed properties from 2004 to 2012 shows that the right of redemption option influences the net selling price. For a property purchased with a $90,000 exercise price (foreclosed auction selling price), a 10 % increase in the foreclosed auction price increases the net selling price by as much as $250 in 2007–2012. The effect of the redemption option is less during 2004–2006 but it is still statistically significant for the most distant time to expiry. Copyright Springer Science+Business Media New York 2015