You Bought the Tax Lien. Can You Protect the Property?

One of the peculiarities of investing in Alabama tax liens is that you can have a financial interest in a piece of real estate without having the right to possess it.

Most of the time, that distinction is easy enough to live with.

Then something happens to the property.

Suppose you bought the tax lien on a vacant house. The grass hasn't been cut in months. A window has been broken. Someone has apparently tried to get through the back door.

Then the city contacts you. It wants the grass cut and the house secured.

There's an obvious problem.

It isn't your house.

You Bought a Lien, Not the Real Estate

Under Alabama's newer tax-lien system, the investor purchases only the lien. Not ownership. Not possession rights. None of that until after the judicial foreclosure lawsuit, currently at least four years away.

That distinction matters.

Ownership ordinarily carries the right to possess property and make decisions about it. A tax-lien investor has a valuable interest to protect, but that interest doesn't come with a general statutory license to enter the property, change the locks, repair the roof, board the windows or start mowing the lawn.

You can't get insurance.

And yet deterioration of the property can directly affect the value of the investor's lien.

That's where things get uncomfortable.

Doing Nothing Has Risks, Too

Imagine a $75,000 vacant house securing your tax-lien investment.

Someone breaks a window.

You decide you aren't the owner, so you can't touch it.

Rain gets inside. Then animals get inside. Then people get inside. Copper disappears. The city starts nuisance-abatement proceedings.

Your decision to avoid the legal risk associated with entering someone else's property hasn't eliminated your risk.

It has simply exchanged one kind of risk for another.

That's an important distinction for real estate investors.

First, Look for Permission

Before deciding whether to assume any risk, look for a way to eliminate it.

Try to find the owner. Or at least one owner, if it's heir property.

If the owner will sign a simple agreement authorizing you to enter the property, mow the grass and perform specified preservation work, the problem becomes much easier.

The authorization should be clear about what you may do. Permission to mow and board a broken window isn't permission to empty the house, renovate it or rent it to somebody.

Do only what you have been authorized to do.

Heirs Property May Give You Another Option

Sometimes the record owner is dead and the property has passed to several heirs.

That can actually create another possibility.

The heirs are called cotenants. Every cotenant has the right to possess the property. A cotenant can also convey or lease that cotenant's own undivided interest without getting every other cotenant to join in the transaction.

That means you may not need to round up twelve cousins scattered across four states merely to establish a legitimate right of access.

If one heir who owns an undivided interest gives you a quitclaim deed to that interest, you become a cotenant. If one heir leases his or her undivided interest to you, the lease can likewise give you rights derived from that cotenant's interest.

There are important limits.

One heir cannot give you everybody else's ownership interest. You can't exclude the other cotenants from property they also have a right to possess. And you shouldn't use one heir's cooperation as an excuse to behave as though you've acquired the entire property. You can't make the other cotenants pay for your improvements or repairs.

But for the limited problem of obtaining legitimate access to preserve a vacant property, acquiring or leasing an undivided interest may solve a problem that initially looked impossible.

What If You Can't Find Anyone?

Now we get to the harder case.

The owner is gone. You can't locate the heirs. Nobody has opened an estate. Meanwhile, the grass keeps growing and the broken window is still broken.

What do you do?

One possibility is to work through the municipality. Tell the appropriate official exactly what your legal position is: you hold the tax lien but don't own or possess the property. Ask what the municipality intends to do and what authority it believes you have to perform the requested work.

Depending upon the property and the amount at stake, legal proceedings may also be worth considering. A receivership could potentially provide a lawful mechanism for preserving property that is being wasted or impaired.

But legal remedies cost money.

Nobody wants to spend $7,500 obtaining judicial authority to cut $200 worth of grass and put $150 worth of plywood over a window. For the right property, though, it might make sense.

Which leaves the real-world answer that lawyers and investors sometimes dislike because it doesn't fit neatly into a box.

You make a risk decision.

Sometimes There Isn't a Risk-Free Choice

Suppose the city has told you to cut the grass and board the broken window. They have state attorney general legal opinions saying they can make you do that for a tax certificate property, even though you don't own it. They can even fine and jail you.

But this is a tax lien. Can you explain the difference to them, or will they think they can stand firm on the older attorney general opinions?

In the meantime, you can't locate the owner.

You don't have a clear statutory right to enter.

You could decline to do anything and hope nothing bad happens.

Or you can explain the problem, ask the city to cut the grass and board the windows and put a lien against the property, and you will pay off the lien. If an owner redeems, you are entitled to be reimbursed that money, plus interest.

Or you could hire someone to mow the grass, board the window and leave.

Is there some legal risk in the second choice?

Yes.

But there is risk in the first choice, too.

The relevant questions become practical ones.

What is the value of the investment? What is happening to the property? What exactly has the city requested? How intrusive is the work? What is the realistic likelihood that someone will object? What damage could result if you do nothing?

And perhaps most important: Are you preserving the property, or are you beginning to exercise ownership over property you don't own?

There's a substantial practical difference between mowing overgrown grass and replacing a broken pane with plywood, on the one hand, and changing locks, removing someone's belongings, beginning renovations or putting a tenant into possession on the other.

The farther you move from preservation toward possession, the harder it becomes to characterize what you're doing as merely protecting your investment.

Real Estate Investing Involves Risk

Real estate investors are comfortable with some level of risk. Otherwise, we'd invest in Treasury securities.

That doesn't mean ignoring legal risk. It means identifying it.

If you know you don't have a clear statutory right to enter the property, that's useful information. Now you can compare that risk with the risk of leaving a vacant building open to the weather, vandals and municipal enforcement.

Maybe the appropriate decision is to do nothing.

Maybe it's worth paying an attorney to pursue a legal remedy.

Maybe you can obtain permission or acquire a small ownership interest from an heir.

And sometimes an investor may decide that spending a few hundred dollars to cut the grass and board a broken window is the least risky choice available—even though nobody can point to a statute giving the tax-lien holder the right to do it.

That's not eliminating risk.

That's managing it.

And in real estate investing, those are two very different things.