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Redemption Interest on Tax Sales

Posted by 15789465 on

First the basics: If you buy a tax sale property in Alabama with a mortgage on it, the mortgage lender must redeem before they can foreclose. In other words, you don't have to make the mortgage payments, they can't do anything bad to you. The WORST thing they can do is redeem and then foreclose. Yes, you lose whatever flipping opportunity you wanted, or rental income, but at least you get your money back plus interest. The interest is the real topic of today's post.  If you buy tax sale property and the owner or lender wants to redeem, they will do that directly with the Revenue Commissioner or Probate Judge, depending on the county. They must pay the auction sales price, plus taxes in the meantime, plus 12% interest. So, you'll get your money back, plus 12% interest. EXCEPT, some counties take longer than others to send your check to you after the owner or lender redeems.  Jefferson County is one that takes a long time.  Let's suppose the following scenario:
  • You pay $1,000 to buy a tax sale property from the state. That is the total of all the taxes due on the property since the date of the auction, plus the auction sales amount. 
  • One week later, the bank with a mortgage on that property (or the owner, it makes no difference) goes to the Revenue Commission or Probate Judge (depending on the county) to redeem. They pay $1,000 plus one week’s worth of 12% interest, or $2.31. 
  • The county receives that $1,002.31 and then waits three months before writing  a check to you for the redemption. The county sends you a check for $1,002.31. 
  • That's principal plus one week's of interest. BUT, you haven't had your money for 3 months, not just one week!  As a result, you’ve earned $2.31 on money that was tied up for 3 months, making your REAL interest rate only 0.9% interest. In other words, less than a 1% return on your money, not a 12% return on your money.
Before buying tax sale property for redemption income, be sure to ask the county how long it takes them to process redemption checks and send the money to the investor if there is a redemption. That knowledge might cause you to change your strategy in response.

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15 comments

  • For what it’s worth, from my experience, Jefferson is the worst, Shelby is the best.

    Gary Boyd on
  • If the bank forecloses before redemption, it usually means they do not know about the tax sale. So, they will usually not include those sums in their calculations for what to bid. How banks decide how much to open bidding at a foreclosure auction is a complicated post. I’ll devote a separate article to that.

    There is no specific requirement regarding order, except that if they foreclose before redemption, all they’ve foreclosed on is the owner’s redemption rights. After the foreclosure, the bank will have their OWN redemption rights, plus the owner’s redemption rights, in case there is any difference or tactical advantage in the two. I cannot imagine a circumstance in which a bank would knowingly decide to foreclose first and redeem second. Howie, you’re my theorist about all things strange and thought-provoking related to tax sales. What do you think? Would there ever be a tactical advantage to a bank so it would decide in advance to foreclose and then redeem?

    Denise L. Evans on
  • If the bank forecloses before redemption, I assume the price quoted at the courthouse steps is loan and fees before taxes and interest. Is the bank specifically required to do it in this order?

    Lister on
  • good info- as always

    Thanks   Keith

    keith cantley on
  • still haven;t researched the issue – but do know that if a junior lienholder redeems property from tax sale the original owner is still the title holder – the only change is that the property is no longer encumbered by the tax sale (but the junior lienholder probably has a right to subrogate the expenses of the redemption)

    howie on

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