All Forum Posts by: Denise Evans

@Deborah Tuck, Many properties are redeemed. The trick is to make redemption so expensive that you almost don't care if they redeem. You either make a quick profit of several tens of thousands of dollars and use it to fund other deals, or you get to keep the property and make much larger profits over many years.

The value of the preservation improvements is the current value of the property after you've done your fix up/clean up, minus the value before you started.  Usually a real estate agent can do a BPO (Broker Price Opinion) for you.  If you had a structurally sound home in a modest part of Birmingham, and it needed yard work, exterior paint, windows resealed, new carpet, new plumbing fixtures, water heater and heat pump, it might be worth $65,000 to $75,000.  You could spend $15,000 to $20,000 on it, and increase the value to $145,000. If the owner redeems, they pay the $80,000 increase in value, not the $20,000 cost of preservation improvements.  Most owners won't be able to afford that.  You'll be able to keep the property.

The trick is to change the order in which people normally do preservation improvements. Typically, people start at the top--the roof--and work their way down. That's the most efficient method.  For tax sale properties in Alabama, you want to start with the fastest and least expensive fixes that add the most value.  Usually that will be yard work, flooring and paint.  The reason you do this is because you want to hurry up and increase value as much as possible before the former owner attempts to redeem.  Once they offer to redeem, your preservation improvements after that point are not recoverable.  

One of my earlier forum discussions addressed the issue of excess bids in Alabama tax sales. I will not duplicate that information here.

A redeeming owner must pay the following charges:

1. Taxes due at time of auction, plus 12% per annum interest
2. An additional 12% per annum interest on the qualifying portion of the excess bid
3. All taxes paid or currently due since the auction, plus 12% per annum interest.

If the property contains a residential structure, the redeeming owner must also pay:

1. The value (not the cost!) of preservation improvements
2. The cost of casualty insurance premiums, plus 12% per annum interest.

If the property is in an urban renewal or urban redevelopment district (as designated by local city government on their official maps), the redeeming owner must also pay:

1. The value (not the cost!) of ALL improvements (whether preservation or otherwise)
2. The cost of casualty insurance premiums, plus 12% per annum interest

Any improvements made after the redemption demand are not recoverable by the investor.

All rents collected or earned before the redemption demand may be retained by the investor.

Knowing this, especially the information about preservation improvements, should make you feel more comfortable about making tax sale homes habitable and rentable, even though there are still outstanding redemption rights.  Document all repairs and improvements with plenty of photos, notes, and receipts. The receipts will help you remember all of your improvements.

The statute says a preservation improvement is "made to preserve the property by properly keeping it in repair for its proper and reasonable use, having due regard for the kind and character of the property at the time of sale."

Go out and invest!

@Deborah Tuck, Alabama does have a complicated system, but there are big rewards for people willing to learn the rules.

In Alabama, individuals can represent themselves in court.  Corporations, trusts, and LLCs cannot (because they have no true "self") except for cases in Small Claims Court.  Currently, Representative Mack Butler (R), of St. Clair and Etowah Counties, has a pending bill that would change that.  It is HB4.  It is currently in the Judiciary Committee.

Under the proposed law, single-member corporations, business entities with only one owner, and LLCs with five or fewer members, could represent themselves in court, through their owner or members. It would make evictions, collections, quiet title lawsuits, and similar cases much easier, faster, and cheaper.  Most such cases are uncontested and do not truly require a lawyer's assistance. You would be held to the same rules as lawyers, though. The court will not cut you any slack if you do not know the rules of evidence or procedure.

If you support this bill, please contact each member of the Judiciary Committee. Tell them you are an Alabama  small business owner, or a landlord or property manager, and often cannot afford a lawyer to protect your rights. As a result, you have no real remedies. Ask them to recommend HB4 for passage by the full House. Members of the House Judiciary Committee, and their email addresses, appear below. Unless you have popup blockers, you should be able to click on each email address in order to create the email message.

Mike Jones, Jr, Chairman (R, Escambia, Coffee, Covington) [email protected]

Jim Hill, Vice Chair (R, St. Clair) [email protected]

Thad McClammy, Ranking member (D, Montgomery) [email protected]

Mike Ball (R, Madison) [email protected]

Marcel Black (D, Lawrence, Lauderdale and Colbert) [email protected]

Paul Beckman (R, Elmore and Autauga) [email protected]

Merika Coleman-Evans (D, Jefferson) [email protected]

Dickie Drake (R, Jefferson and Shelby) [email protected]

Chris England (D, Tuscaloosa) [email protected]

David Faulker (R, Jefferson) [email protected]

Matt Fridy (R, Shelby) [email protected]

Juandalynn Givan (D, Jefferson) [email protected]

Phillip Pettus (R, Lauderdale) [email protected]

Connie Rowe (R, Walker and Blount) [email protected]

There are four different tax sale redemption periods in Alabama.  At the time of the tax sale, the investor receives a Certificate, which entitles it to possession of the property. Three years after the tax sale, the investor may demand a tax deed. Before the tax deed, the person who did not pay his taxes is still technically the owner. Despite that, I always refer to the defaulting taxpayer as the "former owner" because it makes things easier.

1.  The "administrative redemption period" continues for three years after the date of the tax sale. Redemption is accomplished through local county offices.  The investor is allowed to keep all rents collected before redemption.

2. The "judicial redemption period" is called that for historic reasons. It does not require a lawsuit.  If the investor has not taken possession of the property, then the former owner has three years, from the date the investor takes possession, to redeem. If nobody is in possession of the property, the law assumes the former owner is still in possession. For tax sale properties owned by the State, the law assumes the former owner is still in possession.  If the investor takes possession on the earliest possible date--the date it receives the tax certificate, five days after the auction--then the administrative redemption period and the judicial redemption period will both burn off at the same time.  If the administrative redemption period has expired, the judicial redemption is negotiated directly with the investor, or resolved by the courts. The investor is allowed to keep all rents collected before redemption.

3. The "defective tax sale redemption period" arises when the tax sale was void for some reason. The former owner can contest the tax sale, reclaim the property, and pay only the taxes and 12% redemption interest, but will not be required to pay for preservation improvements or insurance premiums.  In order to defeat this type of redemption, the investor must adversely possess the property for three years, starting on or after the tax deed date. This is called the "short statute of limitations" if you want to research it further.  The investor must disgorge all collected rents if the owner redeems.

4.  The "lienholder redemption period" is for one year, and applies to all recorded liens as of the date of the tax sale. Mortgage lenders, judgment creditors, IRS--they all have redemption rights they can exercise in order to protect their liens. Their redemption rights are during the "administrative redemption period" or the "lienholder redemption period," whichever is longer.  The investor must send certified mail, return receipt requested, notice to all lienholders regarding the tax sale. There is no requirement for WHEN the notice must be sent.  On the date the notice is received by the lienholder, that starts the one-year lienholder redemption period.  If the notice is not sent until ten years after the sale (as an example) then the lienholder's redemption rights start on that date.  If a lienholder redeems under this rule, the investor is allowed to keep all rents collected before redemption.

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.