All Forum Posts by: Denise Evans

Manufactured housing communities usually have the best cash-on-cash returns of all real estate investments, but they are management intensive unless you specialize in retirement communities or something similar.

@Rick H., although I now live in Alabama, my law license is in Texas. I claim both Texas and Alabama for tax sale investing expertise, and can fill that need if anyone is interested.

@James Vega, redemption is complicated in Alabama. There are actually four different redemption time periods, depending on the circumstances. They are not terribly complicated once somebody explains them, but it takes a lot of words to make the explanation. More than I can do in a post.  You might want to read through my blog, reachable from my website, for guidance.

Beyond that, if the owner fails to redeem, then the county keeps the excess bid.  Until very recently, "fortune hunters" were able to find that excess money, partner with the former owner, and claim it for a split. That whole industry went away with 2013 and 2014 amendments to the statute.

3 years after the tax sale, the investor can receive a tax deed. The former owner might still  have redemption rights, but the acquisition of a tax deed means subtle legal differences for the investor.  If the investor has actual possession (itself, or through a tenant) of the property for three years after the tax deed, then that cuts off all possible redemption rights and any ability for the former owner to claim the tax sale was void for technical reasons.

The only exception about cutting off redemption rights with three years of possession is the lienholder redemption rights.  They have an extra time period of one year after the investor sends them certified mail notice at their last known address.  If the investor does not send out that notice until 10 years after the tax sale, then the lienholder still has redemption rights. Most investors send out the notice at the end of the 2nd year after the tax sale, so the owner's regular three year redemption period, and the lienholder's 1 year redemption period, both expire at the same time. As a practical matter, if you want redemption income, you want to wait as long as possible before notifying the lienholder. You don't want them redeeming too quickly, do you?

This article is for tax sale investors who want to earn redemption interest income. Investors who want the real estate should read this, also, because sometimes their plans go astray and an owner redeems.

In Alabama, someone who wishes to redeem their property from a tax sale must pay 12% per year interest on the taxes due at time of sale plus all subsequent years' taxes and interest.  If there is a bidding war at the auction, then the highest bid will be greater than the tax bill. The surplus is called the "excess bid." The excess bid money is held by the county for 10 years. Under current law, if someone redeems, then the excess funds are repaid to the investor. If nobody redeems, the excess funds are eventually forfeited and go to the county.

A redeeming owner pays the taxes plus interest, and also pays interest on the excess bid, but only on a portion. The rule is, the owner pays 12% per year interest on the taxes, and also on that portion of the excess bid that is equal to or less than 15% of the tax assessor's value placed on the property. The remainder of the excess bid earns no interest.

An example helps explain this.  Suppose the tax assessor (or revenue commissioner, depending on the county) places a value of $100,000 on a property. It must do this for all properties within the county because the taxes are based on the value.  Suppose the taxes due for the current year are $500, and remain unpaid at the time of the annual auction.  The auction starts at $500, but you and another investor quickly bid the price up to $20,000.  You win the bid.  You pay $20,000 to the probate judge and collect  your tax certificate.  Of the $20,000, only $500 is for taxes, and the remaining $19,500 is excess bid.

Exactly one year later, the owner redeems.  We are going to ignore things like preservation improvements and insurance premiums for the purposes of this post.  I will write about those, later. 

Here is the redemption price tag:

• $500 taxes due at time of auction, plus 12% interest ($60 interest)
• Current year's taxes, paid directly to the tax collector
• 12% (per year) interest on only $15,000 of the $19,500 excess bid ($1,800 interest)  $15,000 is 15% of the tax appraised value of $100,000
• 0% interest on the remaining $4,500 of the excess bid.

The owner will pay a total of $500 for the past due taxes that caused the auction, plus $1,860 in interest.  You will receive your entire $20,000 back ($500 paid by the owner at time of redemption, plus the $19,500 being held by the county) plus $1,860 in interest.

Because some of the excess bid did not earn any interest at all, it "drags down" what we call the "Effective Interest Rate."  If you earn $1,860 per year on an investment of $20,000, then the REAL interest rate is only 1,860 divided by 20,000, or 9.3% interest.  Your Effective Interest Rate on your investment is 9.3%, not 12%

Some of the big national investors are willing to earn an Effective Interest Rate of only 4-1/2 or 5%.  They will not waste time bidding against you in $100 increments. For the example above, the bidding might start at $500.  The very next bid might be from a national investor, for $36,500.  You will probably drop out of bidding at that point, thinking the investor is crazy. They are not crazy, just efficient.  Why waste time bidding against you, if they are willing to pay a LOT more than you and still meet their investment goals?

Hopefully, the owner will redeem. Under our same example above, the owner will pay the same $1,860.  Of that sum, $1,800 is interest on the excess bid of $36,000. The investor will earn 5% on its excess bid. For big  investors with tens of millions of dollars, that is a great return for a relatively safe investment.

This should not discourage you from bidding at the annual auctions. The big investors don't buy EVERYTHING. If you invest in a wealthy county they find attractive (such as Baldwin County) then wait them out. Start looking at properties owned by people whose name starts with "Z," not with "A." The investors do eventually run out of money in their budgets.

To calculate your maximum bid based on your acceptable Effective Interest Rate, this is what you do:

1. Start with tax assessor's value. Let's assume that is $200,000.

2. Calculate 15% of that value.  That gives us $30,000, which we'll call the Working Money, because it will work to earn interest for you.

3. Calculate 12% (the interest rate) of the Working Money. That gives us $3,600. We'll call that the Earned Interest.

4. Decide the Effective Interest Rate you would be happy earning. Let's suppose that number is 7%.

5. Divide the $3,600 Earned Interest by 0.07 (the Effective Interest Rate), which gives us $51,428.  This is the maximum excess bid you can make and still earn 7% interest on your money when the owner redeems. 

6. Don't forget to add the actual taxes due to the amount of your bid. That will always earn 12% interest.  In actuality, that 12% on the taxes will pull up your effective interest rate a small amount, but I wanted to keep these calculations simple. We'll just ignore that for the time being.

Assuming the taxes due were $1,000, your maximum bid will be $52,428.  If the owner redeems exactly one later, he will pay $1,000 in taxes, plus $120 interest on the taxes, plus $3,600 interest on the excess bid.  You will receive a check for $52,428 (return of your auction bid) plus another $3,720 (interest), for a total of $56,148.  Your effective interest rate will be $3,720 divided by $52,428, or 7.09%

This seems a little bit complicated, but if you will work it through with some examples of your own, it will make more sense.

In real estate, the key to the money is in knowing your numbers.  For tax sale investing, it's the same.

@Roderick Smith, the newspaper notice is required to list the past due amounts. Wait for that to come out. Jefferson County won't have it online.

@Giovanni Isaksen Let me clarify my point. I do not suggest selling on a pro forma for what the revenues and expenses would be after capital expenditures and/or sweat equity. I am saying that if rents have been increasing steadily over the last 5 years at 4% per year, and expenses have been remaining fairly stable, it is fair to sell on the next year's net operating income. I, also, am offended at people pricing their property according to what it will be worth after I correct all the deferred maintenance, get rid of their low-quality tenants, find and put into place my own high-dollar tenants, and implement good policies and procedures for tenant retention. They are not due ANY of that value.

I do not think selling on reasonable pro formas caused many of the real estate melt down problems. I think the bubbles were supported and encouraged by self-delusional people buying on an internal rate of return that premised negative cash flows for each of five years, and then huge appreciation and sale in Year Five. When the bubble didn't keep expanding, the IRR model crashed and burned.

@Roderick SmithThanks for Jefferson County date. I called on March 9 and they said they hadn't set the date yet.  I'll update my form on my website, that has all the counties.

@MARK MONTANOI'd like hear about your progress. Thanks!

It depends. Do you mean for the pro forma? You don't need architecturals before preparing the pro formas, if you are comfortable with construction costs and local building codes. For example, you can't just use a $125/square foot rule of thumb, if your particular site and planned design will require more fire walls than some other design, and actually end up costing you $145/foot.  If you are talking to investors, you will at least need elevation drawings. Investors like to see what the project will look like when it is finished. A draftsman can usually do elevations for you, without the need to hire an architect.  Bankers like to see elevations, also. They tell you it is not necessary, but it does help you out a little bit.  Most commercial loans are run through a computer model, but if a banker likes your deal, and likes the design, they can help you out in subtle ways before the numbers are put into the model.

@MARK MONTANO, keep track of building permits being pulled, and planning and zoning requests. If the area has been predominantly single family homes or other low density use, and is changing to high density, developers will have to ask for zoning variances.

What happens many times is that many people get in the market at the same time when they see something like you are seeing. Then, by the time you start construction, there are 10 other projects coming out of the ground at the same time, which drives down rental rates and slows occupancies. Don't let that scare you off, I'm just saying keep track of what other people are doing, and make an informed decision.