How do I get paid upon Redemption

[Glen Michael]

How do I get a hostile redemptioner who refuses to work with me to pay for clearly justifiable preservation improvements done up to the point of redemption?

[Denise Evans]

@Wayne Brooks, I've been studying the law and practice of Alabama tax sale investing for close to 20 years now, and am always discovering more nuances and interesting things.  So, it keeps me engaged, which is good, because I bore easily.  As far as value of preservation improvements, there are several approaches.

1. Best of all possible worlds, someone appraises the property before you do any work, you do only preservation improvements (no upgrades) and someone appraises it afterwards. That gives you legally defensible numbers. It also gives you an expert witness in case things end up in litigation. Expert witnesses are important because if you have only a tax certificate, you are not the owner of the property. That means you cannot fall within an exception to evidence law that says only expert witnesses can testify about opinions, except that an owner of property can testify about the value of their own property.  Not an owner--then no exception.  Also, in a battle between experts, generally speaking an appraiser expert witness will have more credibility with the court than a real estate broker expert witness.

2. Next best, hire an appraiser to do the "before" work, and a real estate agent to do the "after" valuation. That saves a little bit of money. If you have a tax deed, you can value the property yourself, but it is hard for a layperson to value a trashed out home with holes in the roof and termites. There are not a lot of comparable properties on MLS. But, after it's fixed up, there are probably a lot of comparable properties on MLS, so the after valuation is easier. Same problem as #1 above with expert witnesses, though, if you have only a tax certificate.

3.  Next best, take a LOT of photographs, keep receipts for all expenditures and records of your personal time, make notes about what you did and why. When finished with the preservation improvements, hire an appraiser to do a before-and-after appraisal from the photos and notes.

4.  Last place, in terms of desirability, is to try to figure it out yourself by looking at comparables for the "after" value, and then work backwards to the "before" value.  If the "after" value is $100,000, and you spent $20,000 to get it to that place, then the before value was something less than $80,000.  You have to ask yourself, "Would any consumer buy this house for $80,000, knowing they would have to spend $20,000 and then have a $100,000 house when finished, assuming there are no surprises and nothing goes wrong?"  Of course not.  Then you ask yourself, "How much would a flipper pay to buy this house, if he or she were reasonably confident they could spend $20,000 and then sell the property for $100,000 when finished?"  Maybe $70,000?  Maybe $60,000?  You find that out by talking to other investors in your community, and knowing their rules of thumb for such things.  Probably not $70,000, because that would leave only $10,000 net profit, and after subtracting resale closing costs, that's not enough profit to fool with. Let's say closing costs are $6,000 for real estate commission and another $1,000 for title insurance and miscellaneous stuff. That leaves a $3,000 gross profit.  Even at a 22% bracket for ordinary income (which this would be no matter how long a flipper holds it) plus 5% state income taxes plus 15.3% self employment taxes, that leaves only $1,269 net after-tax profit on the deal. Nobody with any experience would buy the profit for $70,000 and spend $20,000 on rehab just to MAYBE make $1,269 in after tax profits.  So, the "before" value is probably south of $60,000.