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Posted over 8 years ago

Alabama Tax Sales - Receive Refund of Overbid AND Keep Property

Alabama is a combination lien and deed state. When you buy at the annual tax sale auctions, you receive a tax sale certificate of the tax lien. BUT, you are also entitled to immediate possession and can rent the property out.  Most lienholders must redeem before they can foreclose their own liens. The only exception is local government liens such as grass cutting, sewer assessments, etc.

If the owner or lienholder redeems, you keep all collected rents. The redeeming party must the taxes, plus interest, plus any overbid (also called excess funds or surplus funds), plus interest on a portion of the overbid, plus the value (not the cost) of any preservation improvements made by you.  If there is no redemption within three years (with some exceptions too complicated to discuss here) then you get to keep the property. Your purchase price was the taxes plus the overbid.  The exceptions for extended redemptions are related to void tax sales, and to investor possession.

That's really cheap real estate. 

BUT, a loophole lets you keep the property and get a refund of your overbid!  Even better, right?

Because of some convoluted Alabama Supreme Court decisions, and some lobbying for statute amendments desired by the banks and foreclosure investors, a loophole has opened up in the tax sale law.

The loophole is brand new, so I have no idea if it will hold up in court. But, there is no downside, and you don't even have to fight it in the courts. The only question is, how long will this loophole last?

Here it is: 

Under current Alabama statutes, only a redeeming party is able to claim the surplus bid. They have to pay the surplus money as part of their redemption price, but they get a credit for the money being held by the county. Since interest accrues on the taxes and the overbid, the result is a very large effective interest rate for the property owner, when compared to the unpaid taxes.

Under Alabama Supreme Court decision issued in September of 2014, whoever is the owner at the time of the claim for the surplus funds is entitled to them. This was a change from prior decisions, which said it was the owner at the time of the tax sale. Frankly, the old method makes more sense to me, but here we are.

Suppose you are the tax sale investor, with a $10,000 overbid. Three years pass, and you receive the tax deed. You are now the owner of the property.  Depending on when you took possession of the property, there might, or might not, still be outstanding redemption rights.  What is called the "administrative redemption" period burns off during the three years after the tax sale. That is redemption accomplished through the county officials.

Once you receive your tax deed, it means the former owner can no longer redeem through the county.  As a result, he cannot redeem and also claim the surplus funds.  It is now impossible for him to do that.  You, as the owner of the property, are now able to claim those funds.  Which means, you can get your overbid refunded to you, and still keep the property!

Sometimes the owner might still have redemption rights because of issues related to possession. But, he has to negotiate redemption directly with the investor. If you are that investor, and if you've already received a refund of your overbid, then I think the owner is entitled to a credit against redemption for that money.  But, if you do things properly, no former owners will be able to redeem at that point.

This creates incredible opportunities in Alabama, where you can possibly buy rentable tax sale properties for less than $1,000 each.

Here is the warning: When you make a claim for the surplus funds, the county will usually ask you to sign an indemnification agreement. It says that if they make a mistake by paying the money to you, and they have to also pay the money to somebody else, then you will reimburse the county.  You are not legally required to sign that agreement. Simply refuse. That will be the end of it.



Comments (2)

  1. Do you have a webinar on this topic?


  2. Hi Denise, is this still true?