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Question of the Week: Day Care Tenant

An investor has been given a price quote for a tax deed on a property. The former owner operates a day care center there. The day care is still in business. The investor asked for my advice. Here it is:

An operating business or a property occupied by a paying tenant will probably be redeemed. On the other hand, they might be short of cash for the time being and willing to sign a lease. Getting that signed lease puts you legally in possession, which is important when burning off judicial redemption rights. Worst case–they redeem pretty quickly and you get your money back. Most likely case, they redeem after several years and you get the rent plus the interest. Best case, three years slip by without them redeeming, and you can now quiet title in yourself.

A day care raises some red flags, though. Are they licensed? If not, then they can be shut down by the authorities. Makes no different to the investor, except that the loss of income makes it even less likely the former owner will be able to redeem.

Liability issues are especially important with a day care. If a child is hurt or killed while on the premises, you better believe EVERYBODY–including the tax deed owner–will be sued. Under some theories of liability, the tax deed owner might be held liable. The investor should discuss with their insurance agent that the tenant will be an operating day care center, and make sure the investor gets the right insurance to cover such risks. Some companies will not insure properties with day care tenants. Some charge a higher premium. Also, the investor should check into getting an umbrella insurance policy. An umbrella picks up the difference between the maximum liability limits on all your other policies, up to the umbrella amount. For example, suppose you buy a $1 million umbrella, which is surprising cheap, btw. If your auto policy has $250,000 liability limits and your homeowners has $100,000 liability limits and your landlord property policy has $200,000 limits, then for whatever thing you get sued for, the umbrella will pick up the difference. It will add another $750,000 to your auto liability coverage, $900,000 to your homeowners, and $800,000 to your landlord policy.

If you are interested in landlord/tenant advice, be sure to visit our companion site, AlabamaLandlords.com to read the blog articles and check out the class, video, article and book resources.

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Exciting Things in Birmingham's District 9

In case you want to skip over this post, don’t! It is about how somebody else’s vision can bring personal financial rewards to you–the tax sale investor. Read to the end, please.

I just returned home from speaking at a Pastor’s Breakfast in Birmingham, at the invitation of City Councilor John Hilliard. I was the featured speaker with a talk about tax sale investing, meaning people were supposed to be excited about MY words. A wonderful bonus for me was listening to Councilor Hilliard’s talk about his vision for the people of his District, and viewing his video about a planned aviation high school. In my opinion, that would be a game-changer for so many families, so many futures. If you teach children it is okay to dream, because you are also giving them the tools to realize their dreams, then the repercussions will echo down through the generations. Our country was built on dreams, and our future will be designed by the dreams of the children now coming up in the school system. We should all help them dream big, because we will also reap the rewards.

If you haven’t already acquainted yourself with Councilor Hilliard’s plans, please do so right away. Lots of exciting things are in the future for District 9, and that means tax sale investors should target that area for purchases and rehab. The future of property values, in my opinion, is very promising! Don’t be left behind, saying something similar to “I wish I bought properties in Avondale when you could buy them so cheaply….” or any number of other examples. Be among the early birds to get in on District 9 and its future! Let other people be envious of YOUR ground-floor investments. To see what’s included in District 9, click HERE for a map and a locator.

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Question of the Week: Insurance

Someone wrote and asked the question, “Where can I find insurance for my tax certificate property?”

I think it will require a work-around. The problem is caused by the fact that you do not yet have ownership. The insurance industry says you do not yet have an “insurable interest.” If the house burns to the ground, you have lost your possession rights, until such time as there might be a redemption. It’s hard to put a price tag on that, to know how much the insurance check should be. You have lost the possibility of maybe owning the property in the future, but that is pretty far-fetched to an insurance company. The easy answer to these difficult questions is for insurance companies to say, “We won’t insure your tax certificates.” Because Alabama is the only state that has the tax certificate and possession format, the market is just not large enough for insurance companies to figure out a risk vs. premium structure.

On the other hand, they do have a lot of nationwide experience with a different kind of delayed ownership situation. That is when someone sells property on a contract for deed or similar arrangement. The buyer does not get a deed until some time in the future, when they’ve made all their payments. Despite that, they are able to buy full value property insurance.

With that in mind, I recommend the following work-around. Acme LLC buys the tax certificate. It then “sells” the property to Jim Acme (sole owner of Acme LLC) on a contract for deed. The contract requires Jim Acme obtain casualty insurance. Jim goes to his insurance agent with his contract for deed and obtains property insurance. Jim should disclose to the agent that it is tax certificate property he is buying. Full disclosure is important with insurance companies. Otherwise, if you have a loss they will claim fraud and refuse to pay your claim.

Note: Big changes are coming in 2020, that can affect the insurance issue. Be sure to attend the class on “2020 Tax Sale Changes” in a city near you, or watch the streaming video. Click HERE for more information.

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Question of the Week: Quitclaim Deeds

From an email, “Hi Denise. Does a quitclaim deed from the former owner give me good title to a tax sale property?”

There are several issues involved in answering this question.

(1) A quitclaim deed transfers all real estate rights from the grantor to the grantee. It does not make any warranties (promises) about whether the grantor actually owns anything at all, or the existence of redemption rights. The taxpayer might have already sold the property to somebody else. A creditor might have executed on their rights. If the taxpayer does not have good title, you will not have it just because you receive a quitclaim deed.

(2) If the investor has a tax deed, it is now the technical owner of the property. A quitclaim deed from former owners will remove title defects by destroying redemption rights and any other claims former owners might have.

(3) If the investor has only a tax certificate, then a quitclaim deed from owners might be dangerous. To understand this, you need to think about the fact that a tax auction trumps virtually all liens except those by local government. They have redemption rights, but they can’t just foreclose and take the property away from the investor. If the taxpayer redeems, all those liens come right back. If a taxpayer quitclaims his rights during the first three years, then the investor does not yet have his own deed. His only route to deed ownership is because of the taxpayer’s quitclaim. I think that the quitclaim carries with it all the baggage of the liens, just the same as if the taxpayer had redeemed. But, if the investor already has a tax deed, then the quitclaim deed just wipes out the redemption rights. That is because the investor already has ownership, he doesn’t need the quitclaim deed to obtain ownership, just to get rid of redemption rights. Be careful about this. If you have only a tax certificate, you might want to obtain a release of redemption rights, not a quitclaim deed.

(4) If the taxpayer has died, you need to make sure you obtain quitclaim deeds from ALL heirs. Usually you need an affidavit from a relative describing who was alive at the time the taxpayer died. Was there a spouse? Children and/or grandchildren? Stepchildren? Parents, aunts, uncles, cousins, nieces or nephews? Download our free article about “Who is the Heir if Someone Dies Without a Will” to then figure out whose signatures you need. Not everybody who claims to be a heir, really is. Some people are heirs and don’t yet realize it. Until you spend money on a property. Then they’ll come out of the wood work. Getting heirs’ signatures is not hard, but you have to make sure you do it right.

(5) If you can get quitclaims from only some heirs, then you are a co-owner with the other heirs. That is not all bad. You can make improvements, buy insurance and pay taxes, but they are obligated for their proportionate share. If they show up and cause problems, you can make them pay their share and, if they don’t, you can foreclose on them. But it also means that any rents you collected have to shared, too. My advice: If you can’t get signatures from ALL the heirs, then get the ones you can, and file a quiet title lawsuit against the rest.

(6) Make sure you use the right form. This might not be so important if you are receiving the quitclaim deed, but it is critically important if you are giving one. Not every document with the words “Quitclaim Deed” at the top do the job correctly. If the wrong language is in the legalese, then it might really be a warranty deed. Use a lawyer, or use a form from a reputable source.

(7) Comply with the recordation requirements for your jurisdiction so you can record it in the real estate records. There are some local variations. Tuscaloosa County, for example, wants you to list the Source of Title at the top of all deeds. In other words, what was the book and page number of the last recorded instrument related to your deed? If it was a tax sale, then you’ll also need to put the book and page number of the instrument by which the taxpayer originally gained title to the property. For all counties, you will need to state in the deed whether parties are married or single. At the top, you will need to have the name and address of the person who prepared the deed. You will also need the name and address of the person who should receive tax notices. Signatures will have to be notarized. You cannot make any handwritten changes on the deed.

(8) Finally, remember this: When someone makes a decision to sign a quitclaim deed, the faster you get it signed the less risk they will change their mind. I recommend taking the deed and a notary public to the person signing, and getting it done right away. You can notarize a quitclaim deed to yourself. For more information on how to become a notary, check out Jefferson County’s website, HERE. All counties are very similar. It is an easy process with very minimal expense.

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Question of the Week: Minerals

Question: “Hi Denise, I hope things going good for you.  Got a question – if I owned a 40 acre tract of land and also owned the minerals. If I failed to pay the property tax, and it is eventually sold at auction — do I lose the minerals too?”

Answer: Sometimes surface rights and mineral rights are severed–separated–via a deed. It might say the sale is of certain described real estate, but with the mineral rights reserved to the grantor. Sometimes the deed is for the mineral rights, and the grantor keeps the surface for sale later or passing to heirs at death. Sometimes an owner will deed the minerals to himself, just to legally separate the minerals from the surface. When that happens, the surface rights and mineral rights are each assessed separately for taxes.

At one time, the owner of the mineral estate paid the ad valorem taxes every year. Now, he can choose to do that, or he can pay a one-time deed tax equal to $1 per $1,000 of value of the mineral interest. Most people elect the one-time charge. That is why you almost never see mineral interests up for sale at the tax auctions. Instead, the owner pays the one-time fee and then, when minerals are actually extracted, it pays the severance tax based on weight or value of material extracted.

If an owner fails to pay the taxes on the surface, that does not affect the mineral rights. The surface will be sold and the minerals will remain in the name of whoever owns the mineral rights.

If the minerals have not been severed, then a sale of the land includes the surface and the minerals. Sometimes investing in minerals rights sold in older tax sales can be very profitable. Other times, investing in seemingly worthless land that includes valuable mineral rights can be incredibly profitable. Taking possession without actually mining or drilled has to be done exactly right, but it’s not really complicated or hard. To find out about this and many other out-of-the-ordinary tax investing strategies, check into our Advanced Tax Strategies live class or video, HERE.

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Question of the Week: Sewer and Other Liens

This question comes from an investor who wants to buy a tax sale property that has a sewer lien on it. He’s willing to do that, and pay off the lien, because the property is worth it. But, he’s concerned that if the taxpayer redeems, will be be repaid for the money he spends to clear the sewer lien?

The answer is, YES., according to the Alabama Supreme Court decision in Morris v. Card, 223 Ala. 254, 135 So. 340 (1931). It is an old case, involving a 1919 tax sale, but it is still valid law. The investor paid off some sidewalk and street improvement assessments. The court said those amounts should have been included in the redemption calculations. For you lawyers out there, the actual quote from the court is at the end of this article.

What other things might this apply to? I think paying off HOA liens would use the same logic. What about paying HOA dues to avoid liens, or cutting the grass to avoid a nuisance lien? There is no statutory or court guidance on those issues, but I think it is logical that you should be paid to do things that prevent liens, just the same as you are entitled to payment for clearing liens.

Properties with local government liens usually do not get redeemed because the price tag is just too high. People usually have truly abandoned the property, because of the liens and the fear of foreclosure. That makes them good properties to target. To learn about other tax sale strategies, many of which are VERY profitable with almost no competition, come to one of our Advanced Tax Sale Strategies classes, or purchase the video. For more information, click HERE.

The actual quote from Morris (223 Ala. 258, 135 So. 343) is “The decree fixes the amount necessary to redeem and takes no account of the sidewalk and street improvement assessments paid by Morris to clear the property of said liens. These amounts should have been included in the amounts necessary to redeem. Wartensleben v. Haithcock, 80 Ala. 565, 570, 1 So. 38; Cobb v. Vary, 120 Ala. 263, 24 So. 442; Turner v. White, 97 Ala. 545, 551, 12 So. 601; Acts 1915, § 240, p. 475. For the failure to allow such municipal taxes and assessments amounting to approximately $ 322.27 and lawfully paid by respondent in the original bill and complainant in the cross-bill, the decree is reversed, and the cause is remanded for proper calculations of the amounts of due redemption charges and interest.”

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Question of the Week: Indemnity Agreement

This question comes from Mobile County. A tax sale investor wanted to exchange his tax certificate for a tax deed once he passed the three year date. The Probate Judge’s office told him that he would have to sign an indemnity agreement before they would give him the tax deed. They wanted him all tied up with legal documents before they would give him what he was entitled to!

The indemnity agreement said the investor would protect the county from any and all claims related to the tax sale property. In other words, if anyone at all sued the county for anything at all about the tax sale, even claims the sale process was void, the investor would have to pay up!

He asked my opinion, and I told him the ONLY requirement for getting a tax deed was paying a $5 fee. I told him to stand firm, refuse to sign the agreement, and insist on getting a tax deed.

He did exactly that. The Probate Judge’s office backed down and said he was not required to sign the agreement, but they were required to give it to him.

Any such “requirement” is just an internal procedure that has nothing to do with the law. If you are asked to sign anything at all before being given a tax deed or tax certificate, check with an attorney before signing away your life. Just because someone asks for something, doesn’t mean they are entitled to it. Even county officials.

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Question of the Week: Quitclaim & Quiet Title

This question comes from someone who bought a tax deed from the State two months ago, found the former owner, and wants to obtain a quitclaim deed from that person. The investor asked, “If I get a quitclaim deed, can I file my quiet title lawsuit right away, without having to wait three years?”

The answer is that the quitclaim deed gives him the owner’s redemption rights. Afterwards, those rights no longer exist since the tax deed and the redemption rights kind of got merged into each other, and now only the deed survives and is the winner. Quiet title lawsuits are to get rid of other people who might have rights in the property. The quitclaim deed does that all by itself, assuming there are no other owners and no lienholders. A quiet title lawsuit is not even necessary.

If there are lienholders, the investor might have to send out the certified letters and wait one year from RECEIPT (not from date of mailing) to clear out those redemption rights. After the year, the investor can file the relatively fast and cheap and easy in personam quiet title lawsuit. No guardian ad litem (GAL) is required because the GAL represents the interests of the unknown defendants. If all of your defendants are known and you can serve lawsuit papers on them, there is no need for a GAL.

In the question I received, there were no lienholders and no other person with ownership rights. In that case, with a quitclaim deed, the investor is good to go. I told him to approach a title insurance company to get title insurance on the property. That way, if there are any surprises, he learns about them BEFORE he gets ready to sell or finance.

Do you want to learn more about easy tax sale strategies to make wise decisions, avoid problems, and speed up the process? Check out the Alabama Tax Sale Investing introductory course, available live at locations around Alabama or over the Internet. Click HERE

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Fair Housing Exemptions

The most likely place for landlords to violate the Fair Housing laws is in the area of emotional support animals. Many small landlords think they are exempt, and can refuse to allow emotional support animals. Watch my video to learn about the Fair Housing exemptions. One of them applies to owners of single family rentals, but there are SEVERE limits on the exemption. “Know Before You Say No!” is my advice.

Link to YouTube video HERE. If you want more information about the Fair Housing laws and how to navigate those pitfalls, check out our Fair Housing for Landlords class and classroom videos, HERE

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Termite Protection as Preservation Improvement

Subterranean Termite Tube Into House

Do not overlook termite protection as a preservation improvement for a tax sale property. There is a foreclosure redemption case that says the redeeming borrower must pay for termite protection.  Durr Drug Co. v. Acree, 241 Ala. 391, 2 So.2d 903 (1941).  Foreclosure redemption includes all “permanent improvements” but that has been defined as any repairs or upgrades. A termite bond is not an upgrade, like adding a bathroom or something. So, it must fall under “repair.”

Because the tax sale “preservation improvements” include repairs, then I think the Durr case is good support for being able to collect them in a tax sale redemption. The statute says “preservation improvements shall mean improvements made to preserve the property by properly keeping it in repair for its proper and reasonable use, having due regard for the kind and character of the property at the time of sale.”  I certainly think termite control qualifies.