The Skinny On Buying Tax Lien Certificates

 

Bidding Basics: Learning to Bid on Tax Liens

To buy tax lien certificates or tax lien deeds at auction is a bit different from bidding at a traditional auction. The bidding system may vary from state to state, or even county to county, depending on their individual rules and regulations regarding tax lien sales. Some adhere to strict formal bidding procedures, while others conduct the sale in a more freeform manner.

Here are some bidding basics that new investors should be aware of before heading to their buying tax lien certificates at auction:

Bidding Down the Interest

This type of bidding method is used when buying tax lien certificates. Unlike a traditional auction, where bidding goes as high as prospective buyers care to pay for the merchandise being offered, bidding down interest is used to allow bidders to decide how low of an interest rate they are willing to accept before buying the tax lien certificate.

Since profit margins are based on the amount of interest which may be collected if a property owner buys back the tax lien certificate during the grace period, investors must take care not to bid "too low," thus eliminating any real profit. Some states, however, require a minimum interest rate, regardless of the actual bid. In Florida, for example, the minimum interest rate that can be collected is 5%, so even if an investor bids 1% to buy the tax lien certificate, they are still guaranteed 5% by state law.

Bidding Down the Ownership

In Iowa, investors may be offered the opportunity to bid down the ownership when buying tax lien certificates at auction. It is not a favorable method of bidding for most investors. As the bidding gets lower, the investor will ultimately receive less of a percentage of the property (and the profits), making it the most undesirable of all bidding methods. For instance, if a bidder bids 80% ownership, they will in turn only own 80% of the property, and only be entitled to 80% of the profits later on if it is sold on the retail market. The state keeps the other 20%.

Random Selection

Some counties and states prefer the random selection method of sale, rather than open bidding, since it seems the fairest way to offer all investors a chance at the properties available. In the random selection process each bidder is given a specific number, than a computer (or person) draws a number for each property under auction. The first bidder number drawn has the right to accept or deny the acquisition for the price of the taxes due. If he denies the property, the next number is chosen, and so on.

Premium Bidding

Premium bidding is more akin to traditional auction bidding. Liens are sold to the
highest bidder offering the most premium over the amount of the lien. Some states, however, do not allow interest to accrue on this "overage," but only the original lien amount.

Off The Shelf Purchasing

In some areas, you can buy tax lien certificates directly from the county tax collector. This is especially popular among tax liens that have already been put up for auction, with no buyer. When purchasing these "off the shelf" or "over the counter" tax liens, take special care to investigate the property beforehand. Many times the properties offered in this manner have not been purchased for a specific reason that may hinder an investor's ability to recoup his losses and make a profit on the purchase.

Participating in the tax lien bidding process isn't difficult, if investors take the time to learn the rules and regulations of a specific county and state before bidding on their first property. Laws differ from state to state, and should be clearly understood to ensure a profitable outcome before you buy tax lien certificates.

 

Tax Lien Sale