All Forum Posts by: Denise Evans

@Helen Kirk, individual investors and hedge funds invest in Alabama tax sale properties.  Either one is facing earning less than 1% per year on their money with traditional safe investments.  If they can earn 12% on $27,500, that is a great deal. The hedge funds come to certain Alabama counties and spend millions of dollars buying tax certificates on properties that are highly likely to be redeemed. Usually that means relatively new residences with mortgages. Sometimes also commercial properties. A nursing home in Shelby County went through this year with an overbid of around $2 million, if I remember correctly.

Of course, they usually bid far over the 15% appraised value. The result is that it pulls down their "effective interest rate" to less than 12%.  If part of your bid earns 12%, and part earns 0%, then all averaged out together it might work out to 4%  That's still more than they can get with other relatively safe investments.

The hedge funds are generally in Baldwin, Jefferson, Madison, Mobile and Shelby counties. In Lee County, you might have just had large local bidders. With the hedge funds, the bidding might start out at $2,006, and then the next bid will be $50,000. That's because they know they will go that much and higher, so why waste time bidding against locals at $100 per bid increase each time. They just immediately go high enough so it's only big investors bidding against each other. This is not to say there are not opportunities for small investors. You just have to be smart about what you target.

What happens to the money on deposit is this. In my example:

Technically, in order to redeem, the owner must pay the full bid price plus the interest.

The full bid price was $30,000. The total of all interest is $2,735.72, for a total of $32,735.72

The owner receives a credit of $27,994 for the money in the county's bank account. That leaves a balance the owner must pay, of $4,741.72.  Of that number, $2,006 is the original taxes that were due, and $2,735.72 is accrued interest.

The county then pays the investor the full $32,735.72. Part of the money comes from the county's bank account, and part comes from the redeeming owner.

Under current law, if the owner never redeems, the county gets to keep the $27,994 at the end of ten years. Since there was not a redemption, the investor gets nothing, except hopefully it gets (and wants) the real estate, so the price tag was acceptable.

For the hedge funds, if all they paid was just the taxes due, and the owner does not redeem in one year, the hedge fund will just not pay the taxes the next year. The property will be auctioned the next year, again. Those are great opportunities for local investors because now the hedge funds won't touch them.  You might work the owner more aggressively to get redemption, or be willing to finance redemption on a payment plan. Or, you might actually want the real estate, not the 12%

It was my pleasure!

Hi @Chris McKinley, I'm sorry about your bad experience.  I'm considered the property tax expert in Alabama, so I'll share some advice with you and with everyone else on BP.

First, property is appraised by the county Tax Appraiser's office. Let's say that number is $170,000.  

If you claim a homestead exemption, $20,000 is deducted from that value, to reach $150,000.

In order to claim a homestead exemption, the property must be owner occupied residential. Such properties are assessed at 10% of the adjusted appraised value. That is 10% of $150,000, or $15,000

For commercial property, or rental properties, or unimproved small parcels, the assessment rate is 20% of the full appraised value.  That is 20% of $170,000, or $34,000.

Once you reach the assessed value, you then apply the millage rate to determine the taxes.  Millage rates have various components, with part for the city, part for the county, and part for the state. As a result, every city is different. For Phenix City, they all add up to 5.9% 

For owner occupied residential property with a homestead exemption, assessed at $15,000, the taxes will be 5.9% of $15,000, or $885.

For rental property assessed at $34,000, the taxes will be $2,006.

To find out local millage rates, you can either call the local Revenue Commissioner's office, or the local Tax Collector. Counties have different officials, depending on what they voted for.  Or, you can try searching online with the county name and the word "millage" in your search string.

If you don't pay your property taxes, it will be auctioned at the spring auctions. The successful purchaser might pay vastly over the actual tax amount and receive a tax certificate. That entitles them to immediate possession, but many do not even attempt possession. They lay low, and then pounce on you years later and sue to kick you off the property, or you can redeem.

If you've remained in possession of your property, this might happen years later, even after the investor received a deed. You will still be able to redeem, but the interest will be huge.

In Alabama, the bid amount over the taxes is called the "excess bid." Investors earn 12% per year interest on the taxes, plus all taxes they pay after the sale. They also earn 12% on a portion of the excess bid. That money is sitting in a bank account at the county, and the principal is repaid to the investor when you redeem.

That portion of the excess bid that is equal to, or less than, 15% of the tax appraised value of the property earns interest at 12% per year.

If your property is tax appraised at $170,000, then $25,500 of the excess bid will earn 12% interest, and also the actual taxes. Everything over that earns 0% interest.

Let's say your property is sold for unpaid taxes due of $2,006 and the winning bid is $30,000. Let's say you redeem exactly one year later. We won't worry about additional taxes due in the meantime, for purposes of this example.

You will owe $2,006 plus $240.72 of interest.

On the excess bid of $27,994 ($15,000 - $2,006), a full $25,500 will earn 12% interest. That will be another $3,060. The final $2,495 of the excess bid earns no interest.

After one year, you will owe a total of $2,735.72 interest on a tax bill that was only $2,006 to start with. That makes your effective interest rate 136%  Even the IRS doesn't charge interest that high. 

The lesson: Even if you have to put it on a credit card, always pay your taxes before the annual auctions!

While this is all bad news for property owners, it's good news for investors. Whichever one you are, understand the law and make decisions accordingly.

Squatters have heard stories about people moving into property with zombie mortgages, and being able to adversely possess them. That is what is driving a lot of that activity. I think Florida has a 7-year adverse possession statute if the property has been abandoned by the owner and any lenders.  I think you have to file some sort of certificate in the real estate records. In Alabama, on the other hand, a pure squatter has to be there for 20 years to get title.  If they have color of title (a deed that turned out to be defective, a will that left them property it turned out the testator didn't actually own, etc) or if it is a simple boundary line issue, you can adversely possess a property in only 10 years.  If it is a tax sale property and the tax sale was defective for some reason, you can adversely possess in only 3 years after you get your tax deed. The squatters don't know those rules. They've heard Internet rumors about states like Florida, and think it is the same everywhere. It's not.

Could be a squatter, or a relative of the owner. He's right, though, you do need to cut the limbs that hang over his roof.  Technically, he's allowed to cut them, but it's better if you do it.

@Tiffani Baggett, welcome to BP! With a buy and hold strategy, make sure you:

1. Are careful in tenant selection. A bad tenant choice made because you are afraid of a vacant property can cost you tens of thousands of dollars. By buying cheaply and rehabbing, you should be able to afford to wait for a good tenant.
2. Have a good lease and you understand each and every clause. Don't just pull a lease off the Internet. If you must, pull several and compare them.  Visit the landlord/tenant forums on BP and read the horror stories that a good lease would have avoided.
3. Have good Rules, Regulations and Fee Schedules.  Rules by themselves mean that if someone violates the rules, you have only two choices. Forgive and forget and hope it gets better, or declare a default and proceed to eviction if you are able. With a fee schedule, there is a price tag attached to every rule. It might be something general such as "Tenant agrees to pay Landlord the sum of $50 per hour plus expenses, including portal to portal mileage for any violation of this Rules for which a specific fee is not associated." For specific things, you might want to say, "An unauthorized animal on the premises shall result in a fee of $20 per day from discovery for the increased monitoring required until the animal is removed, plus a fee of $10 per day for increased wear and tear on the premises due to the presence of the animal."
4. Understand animal related issues and are prepared. Make sure you know the Fair Housing rules about service animals and emotional support animals. They are not pets. You cannot require a pet deposit or charge a pet fee. You CAN have an all-purpose Animal Clause that applies to pets and to disability-related animals. It should have provisions associated with responsible animal ownership. Examples include "no outdoor tethering unless..." and "all animals must be spayed or neutered" and "all animals must be up to date on any required vaccinations. You should also have clauses that protect the property, such as dogs and cats being on flea control medication, and the responsibility to clean up "deposits" from the lawn, and the responsibility to scoop litter boxes daily and clean completely once a week, etc.
5. Inspect often, even if your tenants seem to be "nice people."  I recommend quarterly inspections. In Alabama, you must have a separate agreement, separate from the lease, that allows regularly scheduled pest control, maintenance, and inspections.  If it is in the body of your lease, it is not enforceable. In that case, you will need your tenant's permission before you enter each time. With the separate agreement, you need only the agreement and the schedule.
6. Invest in an inspections app, until you are large enough to need full property management software. I recommend SnapInspect. It does a great job of documenting everything very easily.

Good luck!

In Alabama, if there is a federal lien on property sold for unpaid real estate taxes, then the IRS (or whatever government agency has the lien, such as Medicaid, SBA, etc.) has the right to redeem from the tax sale in order to protect their own lien.  If they attempt to foreclose on their lien without first redeeming, they will not have good title. They MUST redeem.  They cannot simply take your tax sale property away from you.

The investor is obligated to provide certified mail notice to all lien holders. This includes mortgage lenders, IRS, judgment creditors, everybody. There is no time limit for WHEN to give the notice. But, whenever the investor gives the notice, the lien holder has one year from that date to redeem, or the regular 3 years that everybody has after the tax sale, whichever is longer.  If you give your notice one month after the tax sale, the lien holder has 2 years and 11 months left to redeem. If you give it 3 years or 5 year or 15 years after the tax sale, the lien holder has one year from that date to redeem.

Where most investors get in trouble is, they never give the required notice to lien holders. As a result, long after the investor has a tax deed and thinks they are safe, a lien holder can pop up and redeem the property. This is especially dangerous if the lien holder has made any improvements to the property. If the property contains a residential structure, then a redeeming party will also have to pay the value of what is called preservation improvements.  If the property is vacant land, or if it is commercial property, the redeeming party has to pay only for taxes and interest.  Even if the property contains a residential structure--a house for example--and the investors adds on to it or upgrades the finishes, the redeeming party does not have to pay for those.  Just preservation improvements, which basically means repairs. As a result, an investor could lose a lot of money if it does not send out those notices, and then the IRS or some other lien holder redeems.

If you want to speed things up and not wait a year, the IRS will usually release its redemption rights on a tax sale property, without being paid anything at all.  Here is a link for an IRS publication that explains the process:  http://www.irs.gov/pub/irs-pdf/p487.pdf

There are two types of quiet title in Alabama. In personam (which bars only the people named in the complaint) and in rem (which bars everyone, forever, whether known or unknown.)  In order to file the in rem quiet title after a tax sale, you must have three years of active possession counting from the date you were entitled to demand a tax deed, going forward.  In researching Litigation Guarantee in California, it appears that it is not necessary in Alabama, because of the availability of the in rem proceeding in Alabama.  We don't need a company to track down all possible claimants to a property. We simply do our own good faith due diligence, and then file the in rem proceeding and name whoever we've been able to find.

Tax Title Services does a good job for people who do not want to fool with the details of ordering a title commitment from a local closing company and then sending out notices to lien holders.  If you are okay with DIY, it is significantly cheaper to do it yourself.  I'm okay with DIY legal stuff and electronics, but would NEVER DIY even simple electricity or plumbing.  People tell me it's easy and nothing can go wrong, but I don't believe them. Each person is different.

The quiet title action must name all known or identifiable claimants to the property as parties Defendant. The lawsuit begins with a Verified Complaint, in which the plaintiff makes some version of the following statements, under oath:  

"Plaintiff has made diligent inquiry and has not been able to ascertain any other person or persons making claim to or interest in the said lands."

"The Plaintiff does not know of any person who claims any interest in the above described lands or any part thereof, or lien thereon, or encumbrance thereon, except as alleged in this Complaint."

If your lawsuit is an "in rem" quiet title action, then you also name the real estate itself as a party defendant.  In that case, the Circuit Clerk publishes notice of the lawsuit in a local newspaper for three consecutive weeks. That technically and legally puts any unknown defendants on notice that they must enter an appearance in the lawsuit and present evidence as to their claims to the property.  If they do not, then they are barred from complaining in the future. The quiet title order affects them, as well as the named defendants.  (Kind of like the wedding line, "Speak now or forever hold your peace.") Unknown defendants might be the heirs of a certain person, but you don't know the names of the heirs or where they live.  Other unknown defendants might be the shareholders of a defunct and dissolved corporation. Or, it might be people with liens that did not show up in the title search because of bad indexing or something.  The court appoints a Guardian ad Litem to represent the interests of the unknowns, and that satisfies constitutional due process requirements.

Hi @Corwyn Patterson. If you have a tax certificate (whether obtained at auction or from state) you are entitled to immediate possession. If the property is vacant, you can take possession, change locks, make repairs, and rent the property out.  If the property is occupied (even if the people are just temporarily gone on vacation or something) then you must give them written notice to vacate. You must then wait 6 months, and at that time you can sue them for ejectment (not eviction) to gain possession. 

Often, people will then offer to redeem, and the court will let them do that. But, if they wait until after you file your ejectment lawsuit to redeem, they will also have to pay your legal fees as part of the redemption costs. 

The one major thing in all of this that you need to be careful about is if the tax sale was void. The most common reason is because the owner died before the tax sale, but the auction called off the dead person's name. If the tax sale is void, you are NOT entitled to possession, even if you take it in good faith. If you are not legally entitled to possession, then you are not entitled to keep any rents you collect if you do happen to physically take possession. As a result, if the owner contests the tax sale as void then (1) they will still have to pay you for the taxes plus interest in order to "redeem," (2) you will  have to give them all the money you collected in rent, because you are not entitled to keep it; (3) they will not have to pay you for any of your repairs; and (4) you will not be entitled to legal fees if you file an ejectment lawsuit and THEN find out the tax sale was void.  

This is not intended to discourage  you from tax sale investing. It is a very lucrative field. If a 5 acre field had a pot of gold in the middle, and the field was covered in land mines, but you had a map that FOR SURE showed the location of every single mine, you'd go after that gold, wouldn't you?  Of course, nothing in investing is FOR SURE, I'm not saying that.  Just, don't be afraid. You can learn about most of the problems and easily avoid them.