Tax Liens and Tax Deed Sales - Bidding Types and Strategies to Use

If you are new to tax lien or tax deed investing, it is important that you know the type of bidding methods that are used at tax sale auctions. The Premium Bidding and Percentage Bid-Down methods are two of the most popular methods used at auctions. In this article, we will talk about these two methods, as well as some other methods that are used throughout the United States. We will also talk about some strategies to use.

Premium Bidding

About 30 of the states (and Washington D.C.) use the Premium Bidding method. The process is about the same for a tax lien or tax deed auction. Each property has a starting, or minimum bid, and the auctioneer asks if there are any bidders. Anyone that is interested in a property raises their bid cards. The property is then bid up until there is only one bidder left. The "premium" is the amount over the minimum bid. In other words, if a tax lien has a minimum bid of $100, and an investor is willing to pay $105 for it, the premium is said to be $5 ($105-$100=$5).

Typically, at a tax lien sale, you will only earn interest on the minimum bid amount. So, any amount bid over the minimum bid (the "premium") is typically not recouped by the investor. Because of this fact, you should know how much "premium" you are willing to pay for the properties you have interest in.

A tax deed auction using the Premium Bidding method is also referred to as an open or competitive format. Just like a tax lien sale, the successful bidder at a tax deed auction is the investor willing to pay the highest premium on a property. The increment in which the bid amount increases will depend on the minimum bid amount and the county.

Remember that in a tax deed auction you are bidding to get the deed to the property, so there is no interest rate to think about. The goal is to get a property at the greatest discount. So, before you go to the sale, you should have a very good idea of the appraised and market values of the properties you are looking at. This way, you know how good of a deal you are getting.

It is not uncommon at tax deed auctions to see the premium bid up to as high as 80 percent of the assessed value of property. There are also many occasions when no one will bid on a property. No matter how the bidding goes, it is important to stick to your plan and don't go over the limit you have set for yourself on each property.

Percentage Bid-Down

The Percentage Bid-Down method is a lot less common than Premium Bidding, and this method is only applicable to tax lien auctions. States that use the Percentage Bid-Down method include
Arizona, Florida, Illinois, and Louisiana.

In the Percentage Bid-Down method, the bid amount on the tax lien certificate never changes; instead, the percentage rate that the winning investor will get is bid down. Usually, the opening bid will begin at the maximum interest rate allowed by the particular county, and then it is bid down by approximately 1/2 percent per bid. The bidder who is willing to accept the lowest interest rate will be the successful bidder.

There are cases when a property tax lien will get bid down to 0 percent. If this does happen, it is a pretty safe bet that the winning bidder has some "inside" information on the property, like maybe he/she feels that the property owner is not going to redeem and there is a good shot at acquiring the property "free and clear." There are some states that have a cap on how low the interest rate can go down. For example, the rate might be bid down to 1 percent, but the winning bidder will ultimately get a 5 percent flat rate.

Just like the entire tax lien investing process, it pays to plan. Before you even go to the sale, you should know which properties you want to bid on, and how low of an interest rate you are willing to accept. There are way too many liens available out there to accept a low interest rate. Stick to your plan during the auction and don't let your emotions affect the way you bid.

Rotational Bidding

Nebraska, a tax lien state, uses a Rotational Bidding system. In Rotational Bidding, each investor that is registered for sale will receive a bidder number that will control the order in which they bid during the auction. Sometimes, the bidder numbers are assigned randomly; other times, they are assigned according the registration order. If the latter is the case, it is obviously beneficial to register as early as possible.

At a Rotational Bidding auction, the opening bid as well as the interest rate remains constant. The auctioneer will begin with the first investor and ask if they are interested in investing in the first tax lien certificate. If they want it, they will become the successful bidder and then the auction moves to the next property. If the first investor didn't want the property, it is offered to the second bidder, third bidder, and so on, until each property is either sold, or offered to everybody in the room and there are no takers.

It is easy to get frustrated and uneasy at a Rational Bidding auction as you start to fear that the properties you want will sell before your turn comes up. You must stick with your objectives and not bid on a property that is not on your list.

Other Bidding Methods

Other bidding methods are described below:

• Percentage Bid-Down then Premium Bidding: New Jersey, a tax lien state, uses this "hybrid" bidding method. In this method, the Percentage Bid-Down method is the first method used, and if the interest rate is bid down to 0 percent, Premium Bidding is then used.
• First to Bid Tax Amount: This is a "first come, first served" tax lien sale method. The first person to offer to pay cash in the full amount of the tax lien is awarded the tax lien certificate. The sheriff of the county makes the final decision on who is the "first" person. States that use this method are Kentucky, Montana, and Wyoming.
• Sealed Bid: This method is used for the tax deed states of Maine, Nevada and Wisconsin. In the Sealed Bid method, bids on the available tax deeds are mailed in to the county, and the highest bidder for each property wins the tax deed.
• Percent Ownership: Iowa, a tax lien state, uses this bidding method. In the Percent Ownership method, neither the opening bid or the interest rate moves. Instead, the percent ownership of the property that the winning bidder will share with the current property owner goes down: from 100 percent ownership down to the lowest acceptable ownership percent an investor is willing to accept. This unusual form of bidding only occurs if more than one investor bids on the property, and since Iowa is a tax lien state, the percent ownership issue is only applicable if the property owner does not redeem and a foreclosure process is initiated. At this point, the two parties (tax deed owner and property owner) must either agree to terms, or take their case to court.

Are you looking for a better way to invest your money in 2015 and beyond? Or maybe you are just looking to make a little (or a lot) of extra money on the side? Then, you owe it to yourself to find out more about tax lien and tax deed investing.

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