Alabama Tax Sale Question - 25k overbid?

Question

I was recently contacted about a property this gentleman hasn't paid his taxes on, went to tax sale a few years ago. Contacted the county to see how much is owed because he had no idea. They send me the redemption affidavit and it's broken down like this:

Amt of purchase money (2016) 27,000

Excess bid 25,427

Net to redeem 1572

2017 Taxes 1429

2018 Taxes 1614

2019 Taxes 1614

Amount to pay $15,315

I have very minimal experience dealing with this but how does roughly $6k in taxes balloon to a 15k redemption when no preservation improvements have been made? This is in Ohatchee Al (calhoun county). Any help or guidance would be much appreciated while I try to navigate this sale

Denise Evans · Answer

@Trey Crusey, the institutional investors typically bid the price up to around 30% of tax appraised value.  Half their money earns 12% interest and half earns 0% interest, driving the effective interest rate down to 6%. For a special property that they know for sure will be redeemed, and is a high dollar property, they might drive overbid high enough so the effective rate is only 3% or so.

Trey Crusey · Answer

Interesting. Thank you both @Tamara Deering and @Denise Evans! This was my first time hearing of an overbid but it does make sense.

Tax appraised value in 2016 was 178,720 X .15 = 26,808 = roughly the $27000 purch amount. So it sounds like they hit the nail on the head and are earning 12% on just about the whole amount without going over if i'm understanding correctly? So when would you implement this strategy vs just paying the taxes? Is this considered the max amount anyone would ever want to buy the taxes for in an ideal situation? I just have so many questions and it's finally starting to click I think haha

Pic for reference

Denise Evans · Answer

@Trey Crusey, interest accrues not just on the taxes, but also on a portion of the overbid.  You look at the tax appraised value of the real estate, and then take 15% of that number. The portion of the overbid that is equal to or less than the 15% number earns interest. The rest owns no interest

Here is an example.

Taxpayer owns a house with a tax appraised value of $100,000. The tax due are $500.  At auction, the winning bid is $20,000.

The $500 in taxes bear interest at the stated rate. Starting with the 2020 taxes, that rate is 8%. For earlier years, it is 12%.

15% of the tax appraised value works out to $15,000.

Of the $19,500 "overbid" or "excess bid," $15,000 of it will earn interest and $4,500 will not earn interest.

Tamara Deering · Answer

(a)(1) In order to obtain the redemption of land from tax sales where the same has been sold to one other than the state, the party desiring to make such redemption shall deposit with the judge of probate of the county in which the land is situated the amount of money for which the lands were sold, with interest payable at the rate of eight percent per annum from date of sale, and, on the portion of any excess bid that is less than or equal to 15 percent of the market value as established by the assessing official, together with the amount of all taxes which have been paid by the purchaser, which fact shall be ascertained by consulting the records in the office of the tax collector, or other tax collecting official, with interest on the payment at eight percent per annum.  If any taxes on the land have been assessed to the purchaser and have not been paid, and if the taxes are due which may be ascertained by consulting the tax collector or other tax collecting official of the county, the probate judge shall also require the party desiring to redeem the land to pay the tax collector or other tax collecting official the taxes due on the lands which have not been paid by the purchaser before he or she is entitled to redeem the same.  In all redemptions of land from tax sales, the party securing the redemption shall pay all costs and fees as herein provided for due to officers and a fee of $.50 to the judge of probate for his or her services in the matter of redemption.  This application and payment may be executed by an on-line transaction via the Internet or other on-line provision.

(2) The reimbursement to the purchaser from the proposed redemptioner for allowable improvements and insurance premiums as provided in subsections (b) through (e) is not required for the proposed redemptioner to take possession of the property;  provided however, that the proposed redemptioner shall reimburse the purchaser for such costs prior to January 1 of the subsequent tax year in order to complete the redemption process as provided in this subsection.  Failure of the proposed redemptioner to reimburse the purchaser for such costs prior to January 1 of the subsequent tax year shall forfeit the right of the proposed redemptioner in the property.

Gotta love google. It looks like 7,564.51 is interest on the amount paid and taxes paid to date plus the actual amounts paid and the remainder is the interest and amount paid that equals 15% of market value.