Kathleen Rinks had a problem—and because of a new wrinkle in Portland’s red-hot housing market, she also had an opportunity.
Last year, CitiMortgage Inc. went to Multnomah County Circuit Court and foreclosed on Rinks’ home on Southeast Reedway Street.
This March, Rinks, 52, received notice of her problem: Her home, a 1,160-square-foot bungalow surrounded by a white fence and shaded by a lofty Douglas fir, would be sold at auction Sept. 29.
But as the day when she was scheduled to lose her house approached, Rinks seized her opportunity.
Records show that on Sept. 25, four days before the sheriff was due to auction her house on the courthouse steps, Rinks sold what is called the “redemption rights” to her home to Vantage Homes LLC of Norco, Calif. Vantage paid Rinks $9,000 in cash, with another $1,000 due when she moved out of the home.
But Vantage wouldn’t be the only company to make Rinks an offer. The sale of redemption rights is a new phenomenon in Oregon.
Redemption rights give the holder an ability to claw back a house if circumstances change. Those rights belong to the homeowner whose house is being foreclosed, and give the owner a chance to repurchase the home after foreclosure.
If Rinks, for instance, came into some money and wanted her home back in the first six months after it was auctioned, she could pay the auction price plus interest and other costs and get it back. Or if she decided she’s unlikely to redeem her home, she could sell the rights to an investor, such as Vantage Homes.
Joe Dunne, a Portland lawyer who is frequently involved with foreclosures, says the market for redemption rights is “blossoming.” “There’s a very strong secondary market for redemption rights,” says Dunne, adding that he recently advised a client who sold redemption rights on his soon-to-be-auctioned home for $50,000. “They are useless to homeowners, but they have a lot of value to investors.”
Dunne says rights sellers should assess the equity value of their homes rather than just taking what’s offered, because many are selling too cheaply. Why are redemption rights such a hot commodity? Dunne says it’s a result of decisions handed down by the Oregon Supreme Court in 2013. In effect, these rulings required lenders to give homeowners six months to redeem their homes after foreclosure.
The change put home investors, or “flippers,” in a bind: They would not know for 180 days after buying a foreclosed house at auction whether they’d get to keep the house—or whether the owner of redemption rights would trump the purchase.
For flippers, time is money. Such investors often operate with borrowed cash. They want to flip houses quickly to minimize interest costs. Waiting six months to make sure there’s no redemption is costly. There’s another problem, as well: If a former homeowner redeems his property, the law does not allow investors to recoup the value of improvements, such as a new kitchen or windows, they might have made.
Property records show five rights holders redeemed homes last year. It’s happened another eight times this year—and in a couple of those cases, one investor trumped another, taking away a home purchased at auction because the second investor had purchased the redemption rights. “For investors, redemption rights have become a real issue,” Dunne says. “Now the investors go out and buy up redemption rights from people who are losing their houses.”
Portland’s strong real-estate market has also played into the boom. The number of homes available in foreclosure auctions has plummeted as prices have soared.
The result is that investors are pre-emptively knocking on the doors of those few properties in foreclosure that appear to be promising investments. Rinks’ home on Southeast Reedway held exactly the kind of promise investors seek. A floral-printed “Welcome” flag flaps over a porch with a floral-printed mat that also says “Welcome.” A well-tended garden is highlighted by Russian sage and rosemary. Rinks declined to comment. Shortly after Rinks sold her redemption rights to Vantage Homes, another investor, Daniel Radtke of Remedy Real Estate LLC, walked up her garden path. Rinks, a divorce lawyer, answered the door when he knocked. “She seemed nice, and she seemed smart,” Radtke recalls. “And the house looked like it was in good shape, although I only saw the living room.” Radtke paid Rinks $4,000 for her redemption rights—which an owner, by law, can only sell once—not knowing she’d already sold her rights to Vantage Homes. In all, records show, Rinks sold her redemption rights to five different companies in the days before her home was auctioned, pocketing $20,500. Radtke says Rinks stopped communicating with him after taking his money. “She doesn’t answer the door,” Radtke says. “She blocked my email and hasn’t returned my calls.” At auction Sept. 29, Vantage Homes bought the house for $216,500—less than half what Rinks owed. Because Vantage owns the redemption rights, it can start to work flipping the house right away. The other four companies that bought the rights? They’re out of luck. Dunne, the lawyer, says he hasn’t heard of other instances of multiple rights sales. He expects the Oregon Supreme Court will eventually reverse its requirement that flippers give homeowners a second chance: “This whole market for redemption rights will go away.” As for Radtke, he filed suit against Rinks in small-claims court Sept. 30. “Things happened pretty quick,” he says. “She told me she was only selling to me.”
This story appears in the Oct. 21, 2015 print edition as "Redemption For Sale."