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Understaning Bidding Methods When Buying Tax Lien Certificates
Tax lien sales have many different variations. The statutes vary by state. In many areas, the rules will also vary at the county level.
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!
Carlos Scarpero is an experienced real estate investor who specializes in tax liens and deeds. Visit his tax lien and deed blog at http:www.scarpero.comreal_estate.
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