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.