Alabama Tax Lien Sale Auction Season

[Denise Evans]

Shelby County, Alabama kicked off the spring tax lien investing season with a bang on March 27, 2017.  The big investors bid down redemption income to an average of 6% but that's still a respectable return in today's environment. Best of all, they left plenty of properties for local investors to buy, rehab, rent and/or flip.  Expect similar trends throughout Alabama for April and May, ending with Tuscaloosa County on 5/30 and Montgomery County on 6/7. Remember, Alabama tax lien investors are entitled to possession as soon as they receive their certificate, usually 5-10 days after the auction. They can collect rental income and keep the money, even if the taxpayer redeems.  And, for property with a residential structure, the value of any repairs by the investor is added to the redemption price tag.

If you have any questions, ask them here, and I'll try to help as many people as I can.

[Denise Evans]

If the taxes were $721 and the winning bid was $12,000, then that investor wants redemption  income, not rent or real estate. If the taxpayer redeems, they must pay 12% per annum interest on the taxes due, plus a portion of the overbid.  In this example, the overbid is $11,279.  How much earns interest depends on the tax appraised value of the property.  As long as the overbid is equal to, or less than, 15% of the tax appraisal, the whole overbid will earn 12% interest. If the overbid goes over that, then the excess over the 15% value earns no interest.  

If the property had a tax appraisal value of $75,193, then 15% of that number is $11,278.95. So, the entire bid price would earn 12% interest.

If the taxpayer redeemed after exactly one year, he would owe the taxes, plus the interest, but not the overbid amount. That money is kept on deposit at the county and refunded to the investor when the taxpayer redeems.

Using your numbers, the redemption price tax would be $721 for 2016 taxes, plus $86.52 interest on the taxes, plus $1,353.48 on the overbid.  In reality, if the taxpayer waited a whole year to redeem, he would also owe the 2017 taxes plus interest, but I'm leaving that out of my explanation in order to make things easier.

Comparing the total of $1,440 in interest paid by the taxpayer to redeem, against the $721 taxes due, it means the taxpayer's effective interest rate is 199.72%  For the investor, he spends $12,000 to earn $1,440, so his return is only 12%

If the investor had bid $24,000, then only $11,278.95 would earn 12% interest, and the other $12,721.05 would earn no interest. In that case, the investor would have written a check for $24,000, and in one year he would receive his $24,000 back, but still only $1,440 in interest. When we compare those two numbers, it means the investor earned only 6% on his investment.  ($1,440/$24,000 = 0.06) Many investors are happy with earning 6% or 8% or something less than 12%  That is the reason you see bidding get so high on some properties.