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Alabama Law for You

  • Writer's pictureGregory Stanley

Alabama Online Tax Lien Auction Monster (AL Code §40-10-180 (2019) et seq.)

Updated: Apr 21

Several Alabama Counties have moved to the controversial "Online bid-down Tax Lien Auction" format and those counties are in the graphic below. This new Alabama "Frankenstein" system has features from several other states, but, just like depictions of the Frankenstein monster, the creator didn't seem to take the best parts to use in the creation. I mean, why does Frankenstein's monster always have an ugly face? Well, there are several unattractive features with the new tax lien bid-down system, so here is a brief overview of how it is set up.

WORDS: The common vernacular has become to refer to the new system as "Tax Lien Sale," or "Tax Lien Auction" as opposed to the current "Tax Sale" or "Tax Sale of lands." Both systems are selling a lien that earns interest and can be foreclosed on or paid off. They are both effectively "tax liens."

POSSESSION: Just like all tax sales in Alabama, the purchaser is buying a tax lien on the subject property. The difference with the Frankenstein system is the investor has no right to demand possession of the property and will not be reimbursed for preservation work done on the property. The investor will not have the right to fix broken windows, make safety repairs, or kick the vagrants out. Investors will not have the right to even cut the grass or put a tarp on the roof. This means tax delinquent properties in our most expensive neighborhoods could be abandoned and will become open to vagrants for at least three years. (Crack house coming soon to a house near you!) Think about some of the unintentional outcomes:  - The City sends weed notice, but investor has no right to cut grass and sucks up the fees. Recently a client in Homewood investor received her tax bill with an $18k weed lien on it because the former owner didn't keep up the property. (Yes, $18k charged by the city.)  - The Roof leaks and investor can't repair or tarp it for three years, (An abandoned rotting down house will suppress property values of other houses on that street, which will result in lower overall property tax income for the county for three years.)

 - A drug dealer moves in and no one has the right to evict or eject them. ("I'm sorry officer, you cannot come in, and my squatting here is a civil matter, and unless you have someone to press criminal trespass charges, buzz off.") Without the opportunity for possession, local investors have little incentive to purchase tax liens because most if not all local investors are in Alabama tax liens to improve the properties and make them livable, but larger investors are here for another reason.

BIG INVESTORS: Institutional investors have come to Alabama with millions of dollars a year for the 1% a month interest rate they earned on tax delinquent bids and overbids. (12% interest annually for an investment secured by real property is pretty attractive to investment companies with a lot of cash.) Just like Florida and Georgia tax sales, the Alabama Frankenstein system interest rates are being "pre-bid" down to 1/4% per year. The problem is in Alabama there is no 6% or 18% added to the redemption price, so the 1/4% per year is literally all an investor will make for three years. Now look at the sale from the home owner's position.

PURPOSE OF TAX SALES IN ALABAMA: The stated purpose of tax sales in Alabama is to incentivize people to pay their property taxes. But if a homeowner can get a tax lien investor to give them a three-year 1/4% loan to pay their taxes, the incentive to pay real property taxes has greatly diminished. You are as clever as I am, can you imagine a scheme where neighbors bid each other's taxes down to 1/4%? Once at 1/4% the "winner" is chosen randomly from all the investors that bid it down. The other weird aspect of this Frankenstein system is that it appears an investor can file for quiet title of the property at the three-year point, which flies in the face of all other cases and legislation requiring a person hold property in Adverse possession to quiet the title. The ones who will win the most in these cases will be the attorneys suing to unscrew the unlawful taking of real property from innocent old ladies who lived in the house they have owned for years and one day receive an order from a judge to vacate. This is not the purpose of tax lien sales.

LOOKING FORWARD: An Alabama Tax Lien Auction Purchase entitles the investor to make subsequent payments of delinquent taxes, but still earn only the 1/4% annual interest rate. Currently it takes several months after redemption for an investor to get their money back from the county so many investors work out a redemption directly with the home owner and get their money immediately. Under the Frankenstein system, an investor will have no notice of the redemption and when the owner of the property redeems the certificate, the investor has no option but to just wait for their refund check while the investment continues to earn nothing. The good news is that the Frankenstein systems employed by the counties below will certainly be changed.

Gregory S. Stanley, Esq.


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