Alabama Tax Lien Investing: Gap Years

[Denise Evans]

Under the newer (and county-optional) tax lien auction procedure, investors bid down the interest rate they are willing to accept if there is a redemption. Bidding starts at 12% per year. Currently an investor must own all of the outstanding tax liens since the first auction, and it must be four years since the first auction, before it can foreclose the liens to obtain the property.  That waiting time will probably be shortened in the future.

The winning bidder at the most recent auction has the right of first refusal to buy later years' liens at the same redemption rate.  What happens if John bought the 2020 lien at the 2021 auction, and Sally bought the 2021 through 2023 liens at each auction? Now, nobody has all of the liens. Nobody can foreclose.

The problem was fixed in the 2024 amendments. Suppose Sally exercises her right of first refusal at the 2025 auction to buy the 2024 lien, in the amount of $1,500. The county tax collection official will add to that purchase price the full redemption amount for John's 2020 lien. Let's suppose that number adds up to $2,220. That will be added to Sally's purchase price for a total due of $3,720.  The county will send John a check for $2,220. Sally will now own the 2020 lien, plus the later liens. At that point, Sally will own all of the liens and will be able to foreclose.

Not a lot of people know about the law change. If you are Sally, this is useful to you. If you are a third party and Sally is paralyzed, thinking she can't foreclose, you can buy her out and exercise her right of first refusal (and acquisition of the 2020 lien) and you can foreclose. If you are John, and the anchor preventing Sally from foreclosing, you might be able to buy her out cheaply if she doesn't know about the law change. Then you, John, can foreclose.