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Question of Week: Sale to Former Owner

This question comes from Mona Lisa Zimmerman.

“I have just received a tax deed on yesterday for a property in Jefferson County, Bessemer, AL. I am in the process of sending a certified letter to the previous owner, who still has possession of the property (is living there), asking them to vacate the property. I am willing to sell the house back to them. Can I sell it back to them at a fair market value or can I only sell it to them for the taxes I’ve paid plus interest? Also, please verify that these are the correct steps for me to take:
1. Send a certified letter letting the previous owner know that I have purchased the property via a tax deed and ask them to vacate.
2. If they don’t vacate by the specified date (I’m giving them 2 months), start the ejectment process.
3. Alternatively, I will rent to them if they want to stay.
Thank you! “

My answer: Many people sell properties back to the owners at fair market value after they’ve received a tax deed. Technically, the owner can redeem by paying only the taxes plus interest. Many owners do not know that. I am not sure if it is fraud or not to tell someone they must pay fair market value. I am not condemning the people who do that, because I’m truly not sure in my own mind. I would not do that, because it would make me nervous and uncomfortable and it would feel wrong. But that’s just me. It doesn’t mean that is the only correct response.

Yes, Lisa, your outlined steps are correct. If you have only a tax certificate, you must give six months notice before you file your ejectment lawsuit. If you have a tax deed, you do not have to wait out any notice period at all.

There is currently a case pending in the Court of Civil Appeals about the ability to recover “mesne profits” when you sue for ejectment after you have a tax deed.

“Mesne profits” is a very very old Anglo-French word dating back to the time of King Henry II of England, who was the father of Richard the Lionhearted and King John of Magna Carta fame. It is a little bit earlier than Robin Hood. The concept is VERY old. Some people pronounced it as “main profits” because that is the French pronunciation. At the time, all English royalty was basically French by heritage. Some people pronounce the word “mez-knee”. Either one is acceptable.

It means that if you sue for ejectment after you have a deed, you are also entitled to money damages equal to the reasonable rental value of the property for the entire time of the unlawful occupancy by the defendant. The pending case will decide if that applies to a tax deed situation. As soon as there is a decision, I will let everybody know. You should always ask for mesne profits, if you have a tax deed, just in case the court allows it.

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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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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: 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: 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