After placing a successful bid, prospective investors at a tax lien auction would have purchased a governmental- issued tax lien certificate. Subsequently, a tax lien certificate allows the investor to obtain two (2) things; a state- mandated yield from the lien or title to the property. The yield from the lien commands that the delinquent taxpayer pays in order to release the lien. After a certain amount of time (set by the jurisdiction), the certificate guarantees you the title of the property if the delinquent taxes aren?t paid. As a tax lien certificate holder, your investment is generally safe. Occasionally, investors have lost money in such procedures; therefore it is wise to fully comprehend the rules and laws of the area that you are bidding in, and be cautious not to pay too much for the tax lien itself.

There are five (5) basic methods to invest in tax liens in the event that more than one investor seeks the same lien. The winner is dependant upon each state’s laws, of course. Firstly, the prospective investor can bid down the interest. With this method, a buyer can accept lower rates of return. The winner of the tax lien certificate is the buyer that has accepted the lower rates. The premium buying procedure suggests that the investor who is willing to pay the highest “premium” (or excess beyond the lien amount) is declared the winner. Unfortunately, the premium may or may not earn interest and the investor may or may not be reimbursed upon redemption of the lien. Some states awards tax lien certificates randomly by selecting bidder numbers for each of the real estate properties that are up for auction. This is significant in that the concept of public auctions is becoming more and more mainstream and popular with the general public. In fact, within large counties, there are substantially developed internet- based auctions allowing outside bidders to participate. Yet, another tax lien buying procedure is the rotational selection. The rotational selection gives the investor holding bidder number one the first lien offer, whom actually has the right of first refusal. However, if bidder number one chooses to refuse, he will not be offered another bid until his number appears again in rotation. The final method for purchasing tax lien certificates is to bid down the ownership. In most instances, the investor will avoid bidding on liens for less than full right to the property or sale proceeds. None-of- the- less, the bid down the ownership method allows the investor to purchase the lien for the lowest percentage of encumbrance on the property. If the investor is willing to accept that the original owner will own the remaining percentage, then he/she will be awarded the lien.

It is important that you conduct your due diligence prior to making a final decision as tax lien sales aren?t for everyone. Furthermore, there are prominent benefits as well as risk to tax lien investing. One particular benefit is that the maximum rate of return in a tax lien is much higher than other investments. Unfortunately, the payment is required at purchase and failure to pay the full amount results in the cancellation of all lien certificate purchases.

One of the most important things that you need to remember when buying tax lien certificates at a tax auction is understanding the method by which the county determines who is going to buy the tax lien certificate. In some areas, this is determined by the investor bidding down the interest rate for the lien. In many other areas the county will sell the liens on a percentage of ownership basis. In other jurisdictions, the county uses a round robin procedure to determine the winner of the auction. In this article, I will explain the differences between the methods and the advantages and disadvantages of each method.

The most common type of auction is the bid down auction. The auctioneer simply starts the bidding at the top rate for that jurisdiction and then the rate is bid down until the lien is sold. In certain areas, investors can make up for a low rate by paying subsequent taxes and through minimum rate guarantee statutes.

The advantage of the bid down method is you can easily bid on the exact lien that meets your needs. You also don’t have any possible co-ownership scenarios that can make it difficult to file foreclosure and take full possession of the property.

In other states, it is on a percentage of ownership basis. What this means is that the interest rate remains flat, but in the event of foreclosure, the investor and the property owner become co-owners of the property. The initial bid is with the investor at 100% and it goes down until the lien is sold.

This method is great for high interest rates. Iowa uses this method, which means that you are guaranteed a very nice 24% rate. The problem with this is that if you end up as a co-owner with the taxpayer, you may have an expensive legal hassle on your hands to actually take possession of the property.

In other states, the bidding is on a round robin basis. In these areas, the auctioneer offers the lien around the room until someone buys it. They are always at the maximum rate allowed by statute.

In round robin states, you get a nice guaranteed rate of return on your tax lien certificate, and don’t have to mess with the co-ownership issue. However, in round robin states, it is much more difficult to actually get the liens that meet your needs. If you decline during your turn, then you have to wait for luck of the draw to see if you get the lien that you want. If you are a big money investor, then it’s not that big of a deal because you can buy a lot of different liens. But as a smaller investor who can only afford a couple of the liens on the book, this restriction can be very limiting.

As you can tell, the bidding procedure is something that is very important in the tax lien research process. With proper planning, you can wade through the minefield and reap great rewards!