Tax Lien Auctions - Tax Lien

How Tax Lien Auctions Really Work

Tax Lien Auctions can be similar to traditional auctions, but have some very unique characteristics that should be reviewed before becoming an active bidder at one. Individual states (or counties), often have their own rules and regulations regarding these types of sales and foreclosure which need to be thoroughly studied before bidding in a tax lien auction, in order to ensure that bidders walk away with the property they wanted and thoroughly understand their rights in ownership.

Tax lien auctions were designed to allow taxing authorities to recoup lost tax revenue by selling either tax lien certificates (which pays the government all back taxes, but allows the land owner more time to raise the needed cash before permanently losing their property), or selling the property outright and transferring the deed to a new owner.

At the auction site (usually held in the county courthouse), a referee or trustee controls the proceedings by first explaining the sale terms and required deposits. Most states require payment immediately following such a sale, but some do allow 48 hours for payment, if the buyer has been approved by the trustee beforehand.

Little, if any information is generally made available about the properties at tax lien auctions. Most rely simply on a lot number for description and recording purposes. Seldom are bidders even told if they are bidding on a house (let alone its condition), or on an empty parcel of land. That's why carefully researching each property, its location, condition, etc. is so important before auction day.

There are two types of tax lien auction sales: the tax lien certificate sale and the tax deed sale. Both are unique and need to be carefully considered before placing the first bid.

In the auction of a tax lien certificate, the right to lend the homeowner the money to pay outstanding tax debt is auctioned. In the event the property owner fails to pay the lien certificate and interest in full by a pre-determined date, the investor assumes full ownership of the property for just the amount of taxes paid.

Bidding on a tax lien certificate differs from a standard auction in the fact that potential buyers "bid down," or bid on the lowest interest rate they are willing to accept for laying out the cash for the taxes. The lower the interest rate accepted, however, can drastically reduce any potential profit should the current owner find the funds necessary to pay the lien certificate in time and regain ownership of the property.

In some states, the bidding process in a tax lien auction is eliminated, and properties are simply listed with the county, allowing the first investor willing to front the tax money to purchase the tax lien certificate.

Tax deed sales work a bit differently. Potential buyers bid on the actual deed to the property, giving them immediate ownership rights. This is done in a more traditional bidding fashion, in which buyers bid the highest amount they are willing to pay for the property. This allows the investor to immediately begin renovation projects and/or resell the property on the open real estate market. Profit margins for this type of tax lien auction are generally much lower since the bidder must not only pay the taxes due, but a possible premium on the property as well.

Buying at a tax lien auction basically guarantees some amount of profit for the investor, while tax deed sales offer the opportunity to resell a promising property for a profit. Regardless of the type of bidding process used, investors prefer purchasing investment properties in this matter since they can usually obtain them at deep discounts from other forms of sales and purchase.