Secrets of Tax Lien Investing

You've checked out some properties, read up on the county's rules and protocols, and registered for the auction. Now the question is: What can you do to give yourself an edge over your competition? While the basic premise of tax lien investing isn't terribly complicated, there are secret strategies within the tax lien culture. Learn these secrets and you'll be well on your way to success.

There are six different methods of bidding at a tax lien sale, each with its own benefits and disadvantages. It's not enough to familiarize yourself with one or two of these methods. Every auction is different, attended by investors with different styles and levels of knowledge. You'll need to be able to confidentially navigate each of the following bidding methods in order to consistently acquire the properties you desire.

How Low Can You Go?

If the owners of a property for which you hold the lien do succeed in paying their back taxes, the government will reimburse your initial investment. The profits come in the form of interests and back penalties accrued, which you also receive. The auctioneer, starting at a statuary rate set by law, conducts interest rate bidding. Then, the rate climbs up slowly. The tax lien goes to the bidder willing to accept the lowest interest rate.

The bid down method is a useful tool that every investor should learn, but of course it does not work with every auction or against every competitor. The key is to know what you can afford. Bidders who represent institutional investors, like banks, can afford to take on much lower interest rates. When you go up against one of these bidders, your chances of victory diminish seriously. Educate yourself not only as to the types of properties you should pursue but also as to the types of bidders you'll face.

And the Winner is...

The next bidding system, premium bidding, is slightly more complicated. It's widely used so you need to understand it thoroughly. In premium bidding, the government adds a premium to the amount of the highest bid. You receive interest on this premium. The reason for the ensuing complication: the interest rate is not equal across the board. You might receive the same rate for both the lien itself and the premium, or you may get different rates for each. Or sometimes, you earn interest on only the lien or only the premium. You can even lose the premium entirely in some cases. So bid in states and counties with the best deals and leave lost premium auctions to those who have not undertaken the proper research.

That's So Random...

In the raffle system of tax lien auctioning, every bidder's ticket is dropped in a box, and then one is drawn randomly. The secret to getting picked-fill out the two W-9 forms with your social security number on one and the tax payer identification number of your company on the other. This doubles your chances of getting properties.

Pay attention to trends at an auction such as this. If the auctioneer calls a bidder and that bidder declines to buy the property, the auctioneer will call another name. if investors keep declining the property, heed this as a warning. These people may live in the area or know from sources of their own that serious problems plague the property. Remember: not every tax lien is a great deal.

Through the Grape Vine

This a systematic form of tax lien auction. The auctioneer gives the first bidder a chance at the lien and then makes his way one-by-one down the line until someone agrees to the terms. Then the process begins anew, this time starting with the second bidder so that the each investor eventually gets an opportunity at first dibs on a tax lien. The secret here is to go to auction that are poorly attended. If there's a large group of investors in attendance, and you find yourself at the end of the line, you can imagine how dismal your prospects become.

Beware the Amazing Shrinking Encumbrance

Obviously, you want to get the best deal you possibly can for yourself. This last form of auction does not give the investor the advantage. They leave you at the mercy of the owner's decision to pay their accrued taxes or relinquish their home. Tax liens cover 100% of the property's cost. In a shrinking encumbrance auction, that percentage dwindles. You will still earn interest if the owner does redeem their home. But if the property goes into foreclosure, you will only own a percentage of the property, and that equals a foreclosing nightmare for you. Do not be tempted into bidding at an auction of this nature. It is just not worth it.

Don't be caught off guard. Before you make any bid, you need to not only know what type of auction you are participating in, you need to know the nuances of that auction form like the back of your own hand. If you do, you can be assured of a rewarding and enjoyable investing career.
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