Tax Sale Excess Funds Strategy Given New Life

LazarusLike the Biblical story of the resurrection of Lazarus, Alabama Attorney General Luther Strange has given new life to the tax sale excess funds investment strategy.

(Okay, YOU try finding interesting and relevant graphics for some of these blog posts! Plus, I have a minor in Art History that I need to put to good use. Painting by Tuscan artist Duccio di Buoninsegna, 1310)

Attorney General Strange released an opinion regarding the interplay of the former tax sale excess funds statute, and the 2013 and 2014 amendments to that statute.  It was in response to a question from the Cullman County Commission. The Commission was faced with excess funds claims by someone working with a former owner, under a power of attorney. The tax sales occurred in 2009 and 2011. There had not been any redemptions.

The original statute on this topic, Ala. Code Section 40-10-28, said the owner was the one entitled to unclaimed excess funds. Redemption was irrelevant. (See examples below, for newbies. I don’t want to take up space here for people who already generally understand excess funds.)

The 2013 amendment said that for tax sales on or after August 1, 2013, only the redeeming party (if any) could claim the excess funds. In other words, unless the owner redeemed, he or she could not get the excess funds. The 2014 amendment repeated the 2013 amendment, but made it retroactive.  As I’ve blogged before, I thought the 2014 amendment was not enforceable. The Attorney General agrees with me.

The same opinion advised that county commissions may not withhold payment of the excess funds, even if the claim comes more than 3 years after the tax sale.

Attorney General Opinion 2016-027 (download opinion, statute, and amendments here) says:

  • For tax sales before August 1, 2013, the original statute applies.
  • For tax sales between August 1, 2013 and June 30, 2014, the amendment created by Act 2013-370 applies
  • For tax sales on or after July 1, 2014, the amendment created by Act 2014-442 applies.

Bottom line: the Opinion told the Cullman County Commission that for the 2009 and 2011 tax sales, they  must pay over the excess funds to the owner’s agent, even though there was no redemption. In addition, it could not deny payment simply because the initial three years had passed, but must pay over at any time during the 10 years provided in the statute.

For the newbies: Explanation of claiming excess funds

  1. Suppose a property is auctioned for $5,000 worth of past due taxes. There is heavy bidding, and the winning bid is $75,000.  When that money is paid by the tax sale investor, $5,000 is used to pay the taxes, and $70,000 goes into a county bank account as Excess Funds or Surplus Funds or Overbid.
  2. If the owner redeemed, it owed $75,000 plus 12% per annum interest (subject to some limitations not relevant here), but then received a credit for the $70,000 held by the county.  In our example, if the owner redeemed after one year, it would owe $75,000 in principal plus $9,000 in interest. It received a credit for the $70,000 held by the county, leaving a balance of $14,000 that had to be paid to redeem.
  3. At that point, the $84,000 would be paid by the County to the tax sale investor.
  4. Many excess funds investors partnered with former owners to claim the excess funds. If the property were about to be foreclosed, or if the owner knew it had no means or desire to redeem, it might prefer to simply take the $70,000 as a free pot of gold. They former owner and the excess funds investor negotiated a split of the money.
  5. Of course, if the owner later changed its mind and wanted to redeem after exactly one year, it would owe the entire $84,000 redemption price tag, because there would no longer be $70,000 sitting in county bank accounts to use as a credit.  Owners rarely worried about this.
  6. In 2013, the law was changed.  One could claim the $70,000 ONLY if they redeemed.  In other words, a redeeming owner was able to use the $70,000 as a credit against the $84,000 redemption price, but for no other purpose. It could never get the cash. The law was changed by mortgage lenders, who often had to redeem after a tax sale in order to protect their collateral, but did not get the benefit of the statute. In other words, an owner with a mortgage on his property could claim the $70,000, but if the bank wanted to foreclose, it would have to pay the full $84,000 before it would have good title.
  7. Mortgage lenders didn’t like that result, and so lobbied to get the law changed. The new law said you received the excess funds only if you redeemed.  Whoever redeemed, whether owner or lender, got the benefit of the excess funds. If you did not want to redeem, or could not, it meant you basically lost your valuable property and the money an investor was willing to pay for it (the excess funds) and received nothing in return. The new law applied to tax sales on or after August 1,2013.
  8. In 2014, some foreclosure investors realized they owned properties on which tax sales had occurred prior to 8/1/2013. By that time, county officials had taken the position that only the FORMER owner could get the excess funds under the original law, NOT the owner at the time of redemption. It meant those investors would have to pay the full $84,000 (in our example) to redeem from the tax sale and obtain good title. They were not happy with that result. They lobbied to have the law changed again, and applied retroactively. That amendment went into effect on July 1, 2014.
  9. As a result of the two amendments, the entire excess funds strategy, of locating former owners and partnering with them, went away.  Now, it’s back again, at least for tax sales that occurred before August 1, 2013.