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Tax Sales and Foreclosures on Same Property

Posted by 15789465 on

DANGER WILL ROBINSON!!!                      DANGER WILL ROBINSON!!! If you don't understand the reference, you are too young to be investing. So here's the scenario- Bob Borrower owned a valuable piece of real estate with a mortgage on it. Bob didn't pay his property taxes, and the real estate was sold at a tax auction. Spirited bidding resulted in $50,000 of surplus funds, with Tina Tax Sale Investor ending as the winning bidder. Afterwards, Last State Bank foreclosed Bob's mortgage, and Freddy Foreclosure Investor bought it on the courthouse steps. Freddy Foreclosure Investor must redeem from the prior tax sale in order to clear up his title.  Does Freddy have to pay the $50,000 in surplus funds when he redeems, or does he get a credit because the money is sitting in the County's bank accounts? Sad but true, Freddy must pay the $50,000 surplus funds, plus the taxes due at time of auction, plus interest.  This is true for all tax sales occurring before August 1, 2013, when the law changed. That $50,000 will be paid to Tina Tax Sale Investor, who will get her money back, plus interest. She's happy. So, who gets the $50,000 still sitting the County's bank account? Bob Borrower, that's who. He is the ONLY person entitled to get that money.  If he doesn't know to claim the money, then 13 years after the tax sale the money will be the County's to keep, forever. Don't bother arguing with me about what's fair, what's technically right or wrong, subtle points related to Alabama's odd twist on title-theory mortgages, or any other arguments. The Alabama Supreme Court considered all of them in First United Security Bank v. McCollum, decided on November 30, 2012. They decided that Bob Borrower is the only person entitled to that money. I'm sorry. I know you don't want to hear this. But, it's how it is. You need to know this before you make some unwise investing decisions. For tax sales after August 1, 2013, whoever redeems is entitled to the surplus funds. Entirely different rule, starting with this year's tax sales. Buyers Beware, for all earlier years.

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  • Hi Steve, yes this goes WAAAYYYY back. It is not a typo. Thanks for being such a loyal reader of my blog.:)

    Denise L. Evans on
  • Hi Bill, that’s a great story. You were very lucky. The new law is for tax sales occurring after August 1, 2013. It sounds like somebody jumped the gun a little bit and let you, as the redeeming party, claim the surplus funds anyway. Thumbs up!

    Denise L. Evans on
  • Hi Howie, you always ask to the most intriguing and thought-provoking questions. I think that if the law is ruled unconstitutional (and I believe it is unconstitutional, because it makes no allowance for a non-redeeming owner with no liens on his property) then I do not think the counties could sue the redeeming parties to recover surplus funds paid out to them. The counties will just have a double whammy when owners start demanding surplus funds that have already been paid out to redemptioners. I think the counties should sue the bankers lobby who talked the Legislature into passing a law that took care of the bankers and completely threw debt-free property owners under the bus, but that’s my personal opinion.

    Denise L. Evans on
  • what happens if some federal or state court rules in favor of a constitutional challenge to the new law for taking of property, etc. – would the redeeming party have a judgment against them for the excess if it had collected it? would the county ne liable to the previous owner? is it worth considering before it happens?

    howie on
  • Denise, I did one of these a year ago. We foreclosed a mortgage and bought the property at the courthouse sale. The property had been bought at the prior tax sale by someone in NJ for $19,000.00 surplus. I redeemed the property and claimed the surplus. I paid the back tax plus surplus plus interest due which went to the tax sale purchaser. I collected the $19,000.00 surplus from the county which in effect was a wash and left me in clear title possession of the property. It has been exactly one year and I am in the process right now of getting title insurance to perfect a sale. We are waiting for a new Abstract but The Title Lawyer says it should not be any problem. I thought you would like to hear this actual deal. – I really enjoy and appreciate your work- extremely informative and very helpful. Thanks, Bill Fowler

    Bill Fowler on

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