The Impact of Liens On A Title

First and foremost, real estate tax liens do not attach to people but to real property.Once a property becomes encumbered with a lien, it prevents the owner from selling the property until the lien has been released. Otherwise, an existing lien holder could enforce his/her claim through foreclosure, allowing him or her to take title to the real estate. This action effectively removes any claim to the property by junior lien holders.

Title Search

To avoid losing a property to a pre-existing or senior lien holder, a growing number of lending institutions require a title search to be conducted before lending money for the purchase of real estate. A title search is an examination of public records, laws and court actions to make sure that the seller is the legal owner and to reveal all other claims or encumbrances on the property.

Title Insurance

As an added precaution and condition of the loan, lenders will require borrowers to take out a title insurance policy. Title insurance is a contract under which the policyholder is protected from losses arising from defects in the title. A title company determines whether the title is insurable, after a review of the public records. If the title search proves little to no risk is present, a policy is issued. Unlike other insurance policies that insure against future loses, title insurance protects the insured against an event that occurred before the policy was issued.

Escrow Account

In addition, many lenders require that borrowers provide a reserve fund to meet future real estate taxes and property insurance premiums. This fund is often called a trust or escrow account. When the mortgage or deed of trust loan is made, the borrower starts the reserve by depositing funds to cover the amount of unpaid real estate taxes.

If a new insurance policy has just been purchased, the insurance premium reserve will be started with the deposit of one twelfth of the insurance premium liability. The borrower’s monthly loan payments will include principal, interest, tax and insurance reserves, along with other costs, such as flood insurance or homeowner’s association dues.

When a lien is properly established, it becomes an encumbrance that sticks to the property, like a leach, and will not be removed or reinstated until all claims are satisfied.

7 Simple Steps to Start Investing in Tax Deeds

When homeowners default on their property taxes, counties can sell properties at auction. These properties frequently sell at a fraction of the actual value of the home. Therefore, the sales attract investors. These investors bid on tax deeds, and the winning bidder receives title to the home. To invest successfully in tax deed sales, though, you need to follow some basic steps.

Choose A Popular or Up & Coming Location

Tax deed sales take place at the county government level in most U.S. states. In Alabama, the State Department of Revenue and Tax Collector prepares tax-defaulted properties for auction. Some counties conduct tax deed sales quarterly or annually. Pick a county based on your timing preferences. Proximity to the property is also a factor. Buying tax deeds close to home allows for easier property management after the sale. The state of local real estate markets also factors in.

Learn The County and States Specific Systems

Counties set special rules for tax deed sales. For example, Jefferson County auctions tax deeds by item number starting with the lowest number and re-offers properties that fail to receive bids at the end of the auction. The county also re-offers properties that receive no bids within 90 days. The re-offering bid price starts at an amount deemed appropriate by the tax collector’s office. You also need to know how you will be required to pay for a winning auction bid. Counties often require immediate payment. Most require same-day payment.

Locate Property List & Database

Before you invest in tax deeds, you'll want to learn as much as possible about the properties to be sold. This starts with knowing the physical address of each property up for auction. Prior to a tax deed auction, county government agencies publish lists of all properties to be auctioned. These lists are available via mail or in-person requests, and most publish the lists to county tax collector websites.

Research, Research, Research!! Then Research Some More!

Select only properties that seem to offer the greatest profit potential via research. Learn the starting bid price for each property and establish the value of the property. Check with the county tax assessor’s office and compare the selling price of similar properties in the same neighborhood or in adjacent neighborhoods. Factor in the age of these properties and the size of the properties. You also want to inspect the property, but you’ll have to do this from a distance since you do not have a right to be on the property.

Do A Lien Search or Pay for A Preliminary Title Search

Do research on liens on properties that interest you. Other liens might be in place on properties to be auctioned. These include liens for unpaid municipal fines, mortgage liens and other tax liens. In Alabama, state law allows title transfer even if there is an unpaid mortgage lien on a property, but the state allows some liens, including income tax liens, to stay in place.

Attend the Auction or Receive Notification via Email

Find out from the county tax collector when the auction will be held. Some auctions take place online. You must be present for an auction to place a bid. Be prepared to meet the local tax collector’s specific requirements for payment. A cashier’s check might be required. Some counties allow time for you to make the payment after the sale.

It’s Time To Make A Profit!!

Once you have purchased the tax deed, you own the home. The next step is to determine how you want to use your investment. If you want quick cash, make necessary repairs and sell the property. If you want a steady income over a long period, consider renting the property.

Different Types of Liens

Simply put, a lien is a charge or even a claim that, once recorded correctly, encumbers someone’s property to legally enforce the payment of debts or obligations. The lien must be cleared before a warranty deed can be issued.

When a person borrows money to purchase real estate, the lender attaches a mortgage lien to the real estate. Once the lien has been correctly recorded, it encumbers the property and effectively secures the loan. In the event the borrower fails to pay the debt or mortgage, the lender can seize the property as collateral for the defaulting loan.

Liens against the title are not limited to security for loans such as a mortgage. Liens may be recorded against the property by federal, state, county and municipal agencies. When an individual fails to pay federal income taxes, the IRS may record a lien against the individual and his real estate. In addition, the state can record a lien for delinquent state income taxes. Finally, county and municipal taxing entities may record liens against the property for delinquent real estate taxes.

A lien is a legal instrument that allows an individual or agency to compel payment for services rendered or work performed.

For example: Let’s say you hired a carpenter to renovate your kitchen. After sometime, the carpenter invoices you for the work rendered. But, because of a job lay-off, you are either unable or unwilling to pay the bill.

What can the carpenter do?

The carpenter can record a Mechanic’s Lien against your real estate, effectively compelling payment for the work rendered. When you try to sell your home, the title company cannot issue title insurance until you have cleared the lien (paid the debt). Likewise, a lender would not offer financing to a borrower if the real estate securing the loan is encumbered with a pre-existing or senior lien. If the lender ignored the lien, they would risk a great chance of losing the property to the carpenter.

From a lender’s point of view, the Mechanic’s Lien threatens the lender’s interests in the real estate. Likewise, getting title insurance on a lien-encumbered property is nearly impossible.

Liens are not limited to lenders and contractors. A person, agency or corporation can use another person’s property to compel payment for work performed, services rendered or debts accrued by attaching a lien.

Not all liens are created the same.

Voluntary Lien: Basically, the borrower is voluntarily agreeing to use the property as collateral for the loan. The most common example of a voluntary lien is a mortgage. The borrower voluntarily allows the lien to attach to the real estate.

Involuntary Lien: A lien created by law or legal action without the consent of an owner. Examples include taxes, special assessments, federal income tax liens, judgment liens, mechanics liens and materials liens.

Involuntary liens are not created the same. They are either statutory or equitable.

Statutory Lien: A lien that is created by statute. A real estate tax lien, for example, is an involuntary, statutory lien. It is created by statute without any action by the property owner.

Equitable lien: Is a lien, which arises out of common law. It is created by a court action. For example, a court- ordered judgment that requires a debtor to pay the balance on a delinquent charge account would be an involuntary, equitable lien on the debtor’s real estate.

Alabama Tax Lien Certificates

Alabama tax lien certificates are sold at County Tax Sales during the month of May each year. The bidding begins at just the back taxes owed. The winning bidder at an Alabama tax sale is the bidder with the greatest bid.

The original owner has (3) three years to redeem his or her interest in the property. To redeem, the original owner must tender the amount the investor paid to purchase the Alabama tax lien certificateplus 12% per annum on the minimum and the overbid (see notes on bidding).

If the property is not redeemed within the (3) three year redemption period the purchaser of the Alabama tax lien certificate can apply for a tax deed to the property.

Tax Sale Type: Tax Lien Certificates (Sec. 40-10-19 )

Contact: Tax Collector (Sec. 40-10-12 )

Interest Rate: 12% per annum (Sec. 40-10-122 )

Penalty Rate: Not Applicable Not Applicable

Bid Procedure: Premium Bid (Sec. 40-10-16 )

Redemption Period: (3) three years (Sec. 40-10-29 )

Law: Code of Alabama, Title 40, Chapter 10, "Sale of Land." 

Additional Notes:

Important. According to (Sec. 40-10-29  and Sec. 40-10-30 ) after the 3 year redemption period has expired the judge of probate must execute and deliver to the purchaser...a deed to each lot or parcel of real estate sold to the purchaser and remaining unredeemed...and such deed conveyed upon expiration of the redemption period is not sufficient.

As the purchaser of an Alabama tax lien certificate you need to be aware that you will need to consult a legal professional for assistance with a quiet title action.

Left-over liens. Tax lien certificates not sold at the county level can be purchased from the Alabama State Commissioner of Revenue (Sec. 40-10-21  and 40-10-132 )

Alabama Department of Revenue
Property Tax Division
50 North Ripley
Montgomery, AL 36132
(334) 242-1170
Visit Alabama Department of Revenue Website

Caution on bidding. According to (Sec. 40-10-122 ) the bidder will only earn interest at the rate of 12 percent per annum on the amount of all taxes and any excess bid that is less than or equal to 15 percent of the market value as established by the county board of equalization which can be determined by reviewing the tax collector records.

Therefore, should the investor enter into competitive bidding, he or she should never place a bid in excess of 15 percent of the value as determined by the county board of equalization.

Disposition of excess arising from sale. According to (Sec. 40-10-28 ) the proceeds or excess funds generated from the sale of real estate remaining after satisfying the amount of the decree of sale, costs, fees, subsequently accruing, are to be paid to the owner, or his agent, or to the person legally representing such owner, or into the county treasury.

Tax sale overages. According to (Sec. 40-10-28 ) if such tax sale proceeds, tax sale overages, or excess funds are not requested within three years after the sale of the property such money shall thereafter be treated as part of the general fund of the county. In addition, any time within 10 years after the funds have been deemed as part of the general fund of the county, on proof made by any person that he is the rightful owner of such excess money order the payment thereof to such owner, his heir or legal representative else such excess funds shall become the property of the county.

Agreement to locate property. According to (Sec. 35-12-93 ) "(a) An agreement by an owner, the primary purpose of which is to locate, deliver, recover, or assist in the recovery of property that is presumed abandoned is void and unenforceable if it was entered into during the period commencing on the date the property was presumed abandoned and extending to a time that is 24 months after the date the property is paid or delivered to the Treasurer. ..." and "(e) An owner who has agreed to pay compensation that is unconscionable, may maintain an action to reduce the compensation to a conscionable amount. ..."

Presumption of abandonment. In addition (Sec. 35-12-72 ) says "(a) Property is presumed abandoned if it is unclaimed by the apparent owner during the time set forth below for the particular property: (13) Property held by a court, government, governmental subdivision, agency, or instrumentality, one year after the property becomes distributable.