It’s that time of year! As soon as summer turns to fall, you should be thinking about Colorado’s annual tax lien sales. They typically take place in the months of November or December each year. What may come as a surprise to you is that Colorado tax lien certificate interest rates can vary from year to year.
How the interest rate is calculated may seem complicated at first, but is actually very simple. When redeemed, a certificate will pay the certificate holder nine points over the Federal Reserve Discount Rate as of September 1st. So, if the Federal Reserve Discount Rate was .75% as of September 1st then all of the county’s in Colorado will round up to 1%. They then add 9 points to make the interest on tax lien certificates sold in 2016 to be 10%.
Now, Colorado’s tax lien certificates are premium bid. You will typically see this type of bidding at tax deed sales so it may confuse you when used at a tax lien sale. Again, it’s very simple.
At auction, the successful bidders will pay the total advertised price of the lien (the minimum bid) and any premium bid. The winning bidders will still be receiving 10% for their tax lien certificates, however they will not be receiving interest on their premium bid. The buyer never recovers the premium paid over the face amount of the tax lien certificate.
So the premium is what will reduce your profits and in effect, depending on your premium bid, you could actually be making 6% or 5% on your money. This may seem low, but the catch is that certificate holders are offered any subsequent years taxes at the full interest rate.
Knowing the laws and terminology of a state is important. You will become a competitive and seasoned investor as long as you study the rules, ask questions, and take the plunge!