Tax Lien Certificate Auctions – What you need to know about tax lien certificate auctions and tax lien certificate sales
If I decide to go to a Tax Lien Certificate sale or Tax Lien Certificate auction, how does the sale work?
There are four basic types of tax lien certificate auctions or tax lien certificate sales; bid down the interest rate, rotational bidding, premium bidding, and bid-down ownership.
IMPORTANT: You DO NOT have to go to auctions and enter into bidding competition to acquire highly profitable tax lien certificates. We’re addressing the auction procedures here because it’s a very commonly asked question.
Tax Lien Certificate – The bid down the interest rate property tax sale bidding method
In the bid down the interest rate method of tax lien certificate auctions, the interest rate gets bid down, and the person willing to accept the lowest interest rate is the successful bidder. Typically, the interest is bid down in ¼% increments until the bidding stops.
Tax Lien Certificate – The rotational bidding property tax sale method
In the rotational bidding method of tax lien certificate auctions, the county simply goes round-robin, and each person gets to acquire his or her lien of choice from the list of liens available. They continue to rotate through the group until the group stops investing. They pay face value for the tax lien certificate, and receive the maximum interest rate.
Tax Lien Certificate – The premium bidding property tax sale method
In the premium bid method of tax lien certificate sales, you’re bidding a dollar amount above the price of the tax lien certificate. The premium you bid above the price of the tax lien certificate is not recovered, and goes into the county’s general fund. The premiums are typically bid up in one-dollar increments. The person willing to pay the highest premium is the successful bidder. It is important to learn how the county treats the premium above the opening bid. In some counties the full amount paid by the investor including the premium earns interest and is returned to the investor upon redemption of the tax lien certificate. Other counties return the full amount paid by the investor upon redemption but only pay interest on the opening bid amount. Finally there are some counties that do not return the premium paid by the investor, thus when they pay a premium, he or she is lowering their effective interest rate.
Tax Lien Certificate – The bid-down ownership property tax sale method
In the bid-down ownership method of tax lien certificate auctions, you’re bidding down the percentage of ownership of the property if the property owner fails to redeem the tax lien certificate. In all other tax sale methods if the property owner fails to redeem the tax lien certificate the investor can foreclose on the property and receive a deed free and clear. In the bid-down ownership method, the price of the tax lien certificate is the amount of delinquent taxes owed plus fees. The investor willing to accept the lowest percentage of ownership is the winning bidder. If the property owner fails to redeem and the investor forecloses the investor would have to pay the former property owner for the percentage of ownership that they retained as a result of bidding down the percentage of ownership. For example, if the winning bid was for 90% ownership and the investor ended up foreclosing on the property, they would have to pay the former owner 10% of the property’s value to obtain free and clear ownership.
In conclusion, it is imperative that an investor learn the sales process that the county is using for their tax lien certificate sale prior to investing in that county. In the majority of counties the county treasurer’s department conducts tax lien certificate sales. As a best practice, tax lien certificate investors should contact the county treasurer’s office prior to the sale to determine the rules of the sale.