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.
This is great information, thank you so much!!! I am interested in learning how the process works of finding the property tax liens and buying them before they go to auction, is that possible in Alabama?
@Denise Evans Excellent post with great examples and details.
Few will go to the trouble of indendently researching the process nor the statutes, so this will be their only reference, for Alabama.
This post, of course, makes you the resident go-to expert on the topic for BPers.
We have 49 other states to cover defaulted property tax opportunties. Who else is up to the task?
@Denise Evans ...great info! I attended Jefferson County in previous years...I understand the overbid more clearly!!
I am not a tax lien guy, but appreciate the thoughtful and informative write-up nonetheless. Great job!
Demise can you also describe the alternative when the owner doesn't ever pay the taxes and what happens.
@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?
thanks Denise. This had been very informative!
@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.
@Denise Evans great resource. Again, I just had this whole conversation yesterday with someone and my eyes were opened to some crazy potential when dealing with tax sales. Definitely an interesting niche market that I am looking at.
Can my Tax DEED and property be bought and sold out from under me
by the former owner or do I have a 1st Right of purchase ?
I have an Alabama Tax deed and possession of the propertyI have been cleaning, cutting the property lines and killing and cutting weeds, vines and brush that have been growing since 1998 or so, can the Original Former Owner , whom the property taxes were assessed at the time of sale , sell the property after I recieve my Tax Deed from the Probate Judge?
And a the new owner in a $10.00 fee simple quit claim deed, executed 4.5 months after I recieved my deed and did send them a Certified letter about the sale and me owning the property rights now, be entilted to the redeption rights of the original owner of record at the time of sale under Alabama code 40-10-82 & 83?
@Marcus Perkins Sr The former owner can redeem at any time during the 3 years after you take possession of the property, even if you have a tax deed. Some experts believe that if you have 3 years of possession starting with the tax certificate, then the former owner does not get an additional 3 years. Some experts believe the former owner gets at least 6 years from the tax sale, no matter what. Please send me an email off-post, and I'll send you my phone number so we can discuss. It is very fact-specific.
If you've been cleaning and fixing up the property, you are entitled to the VALUE of these "preservation improvements."
Denise...thank you for the very helpful explanation on Alabama. Do you have similar insight you could share on Oklahoma? Thannk....
I'm sorry, @Shannon Keating , I don't know a thing about Oklahoma. Good luck!
Great article Denise. Do you have any experience investing South Carolina?
@Denise Evans This is an excellent post, thank you so much for sharing your knowledge. I actually just finished reading one of your articles called "Alabama Tax Sale Warning" (great article!) and then found this post on BP. I am interested in purchasing tax liens in Alabama; however, as I was going through the listings I quickly realized that it was for Tax Delinquent Land only. I did come across one listing after viewing 30 parcels that had an improvement on it.
I was wondering in your experience in purchasing tax liens in AL, have you been able to find Alabama's Tax Sale list that actually have tax delinquent properties with sfr or commercial buildings listed? If so, would you be able to offer any guidance on how to obtain the listing?
Hi Toi, What list are you using? The county's list of properties set for auction (that list will come out in the spring) or the State's inventory of properties offered at previous tax auctions but not purchased by anyone (in which case, they go to the state) or some 3rd party list?
I became interested in these lien sales a few years back and did research but never invested. I was able to research properties listed by the county that were already past the 3yr right of redemption and was owned by the state. These were properties that were never sold at auction, some dated back to the 1980's. Is it possible to purchase these directly from the state/county? If so, what would I be purchasing? A lien/deed/etc...?
Thank you Denise. Yes, I am using the states inventory list.
@Toi H. , there are all types of properties on the state list. You've just been unfortunate if all you've encountered was unimproved land.
Thank you Denise.
Paragraph from How To Read The Transcript of Tax Delinquent Property. http://publicrecords.onlinesearches.com/view/lid/7...
"If the State has held a Certificate of Sale more than three years from the date of sale by the county tax collections official, a tax deed will be issued to the purchaser by the State. Tax deeds are given without warranty or covenant of any type; it is the purchaser’s responsibility to determine what, if any, interest in the property is actually being purchased. No refunds are made unless the State had no interest to sell, and then only within two years from the purchase date." -
I spoke with someone in the land section dept and she stated you will receive a deed but all taxes, interests or other fees will need to be brought current if you purchase a property held more than years. You will not own the property until you receive a clear title, which is not guaranteed. It was recommended to consult an attorney to do a title search but to move forward in submitting an application if there is interest in a particular property listed because they receive over 3000 applications a month and it may be a while before hear something back......
Alabama sounds very complex but could definitely be work it.
@Toi H. In Alabama I invest in tax certificates, bought about 85 in Mobile Co, most have houses, warehouse, 4-plex, etc on them. Guessing you are looking at state level, stuff no one bought at auction. Plenty to choose from, we have 2 left that will probably be able to get tax deeds for, so would say drill down your search to county level and there should be plenty.
Thank you Darron. Yes I was looking at the state list for Jefferson county; properties not sold at auction dating back to 1988. After the parcel codes started making sense I was able to drill down and find what I was looking for.
@Toi H. , glad I could assist!
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