How Tax Liens are Sold

Jan 24

States, counties, and other municipalities sell tax lien certificates to the public in "auctions" when property owners fail to pay property or other taxes or fines. Conventionally, auctions are held in person; however, Internet-based auctions (especially within large counties having many liens) have grown in popularity as this method allows for bidders from outside the area to participate.

Every lien is priced at somewhere between the amount of property taxes owed and the assessed value of the underlying property: the price includes delinquent taxes, accrued interest, and costs associated with the sale.

Depending on the jurisdiction, bidders on a tax lien have two different costs to consider:

a) The interest rate they are willing to accept as a return on investment
b) The dollar amount they are willing to pay for tax lien

States mandate maximum and minimum interest rates payable on a tax lien certificate. If there are two bidders on a tax lien, the bidder willing to accept the lower interest rate will be considered the winner. While it is possible to bid down to below 1% interest (even in states where there is a mandated higher minimum), in practice this rarely happens. If there are two or more bidders who are willing to bid the same (lowest interest amount), which one wins the bidding depends on rules that vary by jurisdiction.

In some jurisdictions - so called "premium" jurisdictions, bidders are also able to offer to pay more than the price of the tax lien set prior to the auction. A bidder might be willing to pay 15% or more above the starting price of the tax lien because their due diligence reveals that the value of the underlying property - and the return - is worth the risk of paying more for the tax lien certificate.

Housing developers are known to subdivide property in ways that mask underlying property values. One way is to put a required feature, such as a man-made lake required for drainage, into a single parcel and then stop paying property taxes on it when the project is 100% sold. The market value of the property may be high (given its location) while the property itself is valueless because nothing can be done to improve it. Investors who have done their due diligence will avoid bidding on properties that fall into this or similar category.

Tax lien certificates offer the security of knowing exactly how much your investment will earn, and when. One of the keys to intelligent tax lien certificate investing is doing proper due diligence - knowing the true market value of the underlying property and any circumstances that might affect the market value when it comes time to redeem the certificate.

Another aspect of due diligence not performed by most investors is modeling the return on investment based on the price paid and interest accepted. Knowing how price, interest, subsequent tax payments and redemption penalties affect returns enables investors to be more secure about any potential risks involved.

LienLog contains capabilities and tools to enable tax lien investors to perform both types of due diligence: on the underlying property and to model how price, interest and other variables affect returns.

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