Tax sales are done through a public auction process.
The reason for this is to establish that the delinquent property owner will get the fairest treatment possible. Each of the states have passed their own method of doing this and it ends up that there are several different bidding methods that have evolved over the years. We will discuss the various methods in this article.
Tax Sale Bidding Methods
Tax deed sales (where you end up owning the property after the sale) all use the same basic method. They sell the property to the person giving the "highest and best" bid, or, in other words, to the person willing to pay the most for the property.
The only real difference in the bidding systems for tax deed sales is the starting level for the bid. In some jurisdictions the minimum bid is some percentage of either appraised value or market value. In other jurisdictions it is the taxes, interest, and penalties owed.
Where you find a major difference in bidding systems is in Tax Lien sales. There are several different systems used for tax lien sales.
Round Robin bidding: This is a very simple system, they go around the room in seating order and ask if you want to buy the lien. If you pass on it, the next person has the opportunity to buy it or pass on it.
The benefit of this system is that everybody gets an equal chance to buy a lien. The disadvantage is you don't get the chance to pick which lien you get offered. You can only say yes or no to what is offered.
Lottery System bidding: This is a high tech version of round robin bidding. Here the jurisdiction has a computer program that uses what is known as a random number generator to pick the person who gets the chance to buy the lien. Each bidder has a bidder number and all the numbers are entered into the computer. The computer operator pushes a button and the computer picks a bidder number.
The benefits and disadvantages of this system are the same as round robin bidding with one small difference. Luck also enters into this bidding. In theory every person should be picked the same number of times but the reality is some people will be called on more than other people.
Highest and Best Bid: In this system they sell the lien to the person willing to pay the most money for the lien. There are several different variations to the system. The issue is what happens with the amount you bid above the taxes owed, which is called the overbid or premium.
1. Interest on the premium: In this variation you earn interest on the total amount of your bid. So if the minimum bid for the lien is $2,000 and the highest bid is $20,000, you earn interest on the whole bid of $20,000. This system does favor those with more money to invest and is one that is favored by institutional bidders, who will often bid as much as 50% to 70% of market value of the property to buy the lien. Upon redemption you get the premium back.
2. No interest on the premium: This system pays you interest on the taxes owed but no interest on the premium or overbid. The effect is that any premium you bid reduces the effective interest rate you earn on the lien. Upon redemption you get the premium back.
3. No interest on the premium and you don't get the premium back: This system is only used in Colorado and Mississippi and is the only system where you can buy a tax lien, have it redeem, and still have the possibility of losing money. In these two states you do not get the amount you bid in overbid or premium back. Therefore it is possible that the interest you earn is less than premium you bid, which would result in a loss.
4. Interest on the premium but a cap on how much interest you can earn: This is the South Carolina system. They sell the lien to the highest bidder and you do earn interest on your total bid, but the total amount of interest you can earn cannot exceed the dollar amount of the minimum bid. For example: If the lien is $2,000 you could bid $60,000 to buy the lien, but you would not make more than $2,000 in total interest on your bid. Upon redemption you get the premium back.
Percentage of Ownership Bid: In my opinion this is a very flawed system but is, unfortunately, used in several states. The lien is sold to the individual who is willing to take the smallest percentage of ownership in the property, if, and only if, the lien does not redeem.
The flaw in the system only occurs if there is no redemption to the lien. In that case, the lien buyer becomes a tenant in common with the delinquent property owner and has to ask the court to partition the property to get their money out. This is an expensive process and if you have a small percentage of ownership, for example, less than 25%, the costs could be prohibitive.
Further evidence that this is a flawed system is that although it is the state law in several states, a number of jurisdictions in those states have devised ways to do lottery sales or round robin bidding instead of percentage of ownership bidding.
Bid Down the Interest Rate: This system is used in several states and is often misunderstood by those new to tax sales. For example, IL, NJ, FL and AZ use variations of this system. Often these states are touted as 18% or 16% states, whereas the reality is that is where the bidding starts. The lien is sold to the individual who is willing to accept the lowest interest rate. Often times that will turn out to be 5% to 8% rather than 16% to 18%.
The only real difference in the bidding systems for tax deed sales is the starting level for the bid. In some jurisdictions the minimum bid is some percentage of either appraised value or market value. In other jurisdictions it is the taxes, interest, and penalties owed.
Where you find a major difference in bidding systems is in Tax Lien sales. There are several different systems used for tax lien sales.
Round Robin bidding: This is a very simple system, they go around the room in seating order and ask if you want to buy the lien. If you pass on it, the next person has the opportunity to buy it or pass on it.
The benefit of this system is that everybody gets an equal chance to buy a lien. The disadvantage is you don't get the chance to pick which lien you get offered. You can only say yes or no to what is offered.
Lottery System bidding: This is a high tech version of round robin bidding. Here the jurisdiction has a computer program that uses what is known as a random number generator to pick the person who gets the chance to buy the lien. Each bidder has a bidder number and all the numbers are entered into the computer. The computer operator pushes a button and the computer picks a bidder number.
The benefits and disadvantages of this system are the same as round robin bidding with one small difference. Luck also enters into this bidding. In theory every person should be picked the same number of times but the reality is some people will be called on more than other people.
Highest and Best Bid: In this system they sell the lien to the person willing to pay the most money for the lien. There are several different variations to the system. The issue is what happens with the amount you bid above the taxes owed, which is called the overbid or premium.
1. Interest on the premium: In this variation you earn interest on the total amount of your bid. So if the minimum bid for the lien is $2,000 and the highest bid is $20,000, you earn interest on the whole bid of $20,000. This system does favor those with more money to invest and is one that is favored by institutional bidders, who will often bid as much as 50% to 70% of market value of the property to buy the lien. Upon redemption you get the premium back.
2. No interest on the premium: This system pays you interest on the taxes owed but no interest on the premium or overbid. The effect is that any premium you bid reduces the effective interest rate you earn on the lien. Upon redemption you get the premium back.
3. No interest on the premium and you don't get the premium back: This system is only used in Colorado and Mississippi and is the only system where you can buy a tax lien, have it redeem, and still have the possibility of losing money. In these two states you do not get the amount you bid in overbid or premium back. Therefore it is possible that the interest you earn is less than premium you bid, which would result in a loss.
4. Interest on the premium but a cap on how much interest you can earn: This is the South Carolina system. They sell the lien to the highest bidder and you do earn interest on your total bid, but the total amount of interest you can earn cannot exceed the dollar amount of the minimum bid. For example: If the lien is $2,000 you could bid $60,000 to buy the lien, but you would not make more than $2,000 in total interest on your bid. Upon redemption you get the premium back.
Percentage of Ownership Bid: In my opinion this is a very flawed system but is, unfortunately, used in several states. The lien is sold to the individual who is willing to take the smallest percentage of ownership in the property, if, and only if, the lien does not redeem.
The flaw in the system only occurs if there is no redemption to the lien. In that case, the lien buyer becomes a tenant in common with the delinquent property owner and has to ask the court to partition the property to get their money out. This is an expensive process and if you have a small percentage of ownership, for example, less than 25%, the costs could be prohibitive.
Further evidence that this is a flawed system is that although it is the state law in several states, a number of jurisdictions in those states have devised ways to do lottery sales or round robin bidding instead of percentage of ownership bidding.
Bid Down the Interest Rate: This system is used in several states and is often misunderstood by those new to tax sales. For example, IL, NJ, FL and AZ use variations of this system. Often these states are touted as 18% or 16% states, whereas the reality is that is where the bidding starts. The lien is sold to the individual who is willing to accept the lowest interest rate. Often times that will turn out to be 5% to 8% rather than 16% to 18%.
Reader Feedback
submit
-
Reply
- TaxSaleMan TaxSaleMan Nov 5, 2009 @ 6:11 pm | in reply to The Doctor
- There are several places where you don't get paid interest on your overbid/premium. You can calculate your bid by doing the following:
1. Determine the average time to redemption (by doing a redemption study).
2. Determine what is an acceptable rate of return for you.
3. Tax the rate that state pays and divide it by the acceptable rate and then determine what you would make on a full year - then adjust by the expected time to redemption.
-
Reply
- TaxSaleMan TaxSaleMan Nov 5, 2009 @ 6:07 pm | in reply to Douglas Fodor
- Sure you can, the tax deed sales are outright sales of property. I have found that most go for 80% to 95% of mkt value, so I don't like them as well as tax liens.
Your answer to the next questions is www.taxsalelists.com They post several thousand tax sale lists a year on their site and have the information you are looking for.
-
Reply
- Larry Larry Sep 17, 2009 @ 4:27 pm
- This is some good info here, It is about all I need with the laws i studyed about this subject.
-
Reply
- Douglas Fodor Douglas Fodor Sep 16, 2009 @ 3:07 pm
- Can you actually purchase properties at tax sales that you do own outright, that do not have a redemption period. In otherwords, my question is does a tax sale situation exist where the property purchased at the sale by the highest bidder is owned outright at the time of purchase by the individual who purchased it at that auction. Next, does this information about when the tax sales are in all the different counties throughout the US. exitst in a booklet form anywhere?
Can you find a database of all the states which have tax lien sales, and the endemic redemption periods for each county listed for that state, so differennt counties in one state could have different types of tax lien sales.
-
Reply
- TaxSaleMan TaxSaleMan Jul 18, 2009 @ 1:13 pm
- The articles is about tax sale bidding - not a course on tax sales in general (if you are interested in a good source of info on tax sales see the links below). Related to that aspect, I will answer the applicable parts of your question.
1. There are a number of states where this system is used.
2. You calculate the bid by dividing the interest rate paid by the lien by the interest rate you are willing to accept. Estimate the average redemption period in that jurisdiction (you can determine this through a redemption study). Assuming a 2 year redemption period and the average lien redeems in 1 year, your bid would be 18%/12%, which equals 1.5, which you multiply by lien amount (assuming a $1,000 lien you would get $1,500) which means you could bid a $500 premium.
3. Most liens in these jurisdictions will have somebody bid an overbid (12% on a one year investment is quite attractive when US Treasuries for one year pay less than 1%).
-
Reply
- Tom Tom Jul 12, 2009 @ 8:45 am
- Thank you
-
Reply
- The Doctor The Doctor Jul 11, 2009 @ 3:43 pm
- Good article, but incomplete, e.g. premium overbid states where you don't get paid interest on the premium - how do you calculate your highest bid? What states use this system? Does anyone really overbid in this system and why? How long does it take to get the deed if the property does not redeem? Months? Years? Governments are really bad at returning your overbid or deeding you the property. And legal costs can be very high.
Sources for Investing in Tax Sales
I have found these links useful
- TaxSaleLists.Com - a source of tax sale lists
- This site is the only one in the country that posts tax sale lists for every state. They post about 10,000 tax sale lists a year. They also have some good publications on the subject and I have been told they have a good training course.
- An Introduction to Tax Sales
- This is a one hour webinar about tax sales that is free. Good information for 55 minutes and they will want you to buy their 15 hour training course the last five minutes. You might consider it, as it is nominally priced versus some of the "gurus" and they do know what they are talking about. The information you get for free is more than you will get from some people for several thousand dollars.
- How to learn about investing in tax sales
- A good article on investing in tax sales and how to find out where to learn about tax sales investing.
- Rip Off Report - search this site before giving anybody your money for instructional training
- This site has listings of complaints posted by customers for almost all the "questionable" guru programs. If they aren't here, then who you are considering is probably ok.
- Search Systems (find all the sites for a taxing jurisdiction)
- This site has links to almost every jurisdiction so you can get property information (assessor, tax collector, real estate, etc.) on properties, including those on tax sales. Instead of spending hours on google trying to find the assessor's site for East Podunk, Somewhere, Search Systems will get you there quickly.
- A great article about how you can use the internet for tax sales.
- Talks about how the internet can be used for doing due diligence and the internet sales.
by TaxSaleMan
25 Years on Wall Street followed by 19 years in tax sales. I would like to share 19 years experience being responsible for acquiring over 77,000 tax s... (more)
Explore related pages
Tax Lien Bidding and the Inside Secrets in Florida- We discuss the quirks of Florida Tax Lien bidding
What do you get?- When you are a tax lien buyer, what do you actally recieve?
On-Line Workshop- Learn about tax sales
real estate
Tax Sale Earnings- One of the most misunderstood aspects of tax sales is what you actually earn fro...
Real Estate Investment- In todays economy, most of us striving for new ways that can replace today's eco...
