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Tax Lien Bidding Systems

Every state uses a particular system from a group of tax lien bidding systems. Some counties have a set bidding system they must follow, and others are allowed to chooses whichever system they want. It's important to know which tax lien bidding systems are being used in your county or the county you are bidding in. Even more important is to know how each bidding system works so there are no surprises when you're attempting to invest your money.

Bid down the interest - The state sets a maximum interest rate that can be earned. Bidding starts at that interest rate. And investors literally "bid down the interest". Basically, a bid is whatever minimum percentage an investor is willing to earn on a certain investment. Thus you'll find that investors are willing to go lower on more reputable properties that are not only more likely to pay off, but also more likely to pay off quickly. Some states offer a minimum percentage return no matter how low the bid goes. For instance, if the minimum is 5% like in Florida, you can bid down the interest to 1/4 of 1% and still earn a state mandated minimum of 5%. This is obviously to the bidder's advantage as it allows you to bid very low and still clear a higher percentage.

Bid down the ownership - This one is also surprisingly self explanatory. Investors bid down how much of the property the lien is good for. What this means is that if the property eventually goes default you can only foreclose on that percentage of the house which the lien was good for, which is almost impossible to enforce depending on the percentage of the house owned. This is not a preferable system.

Premium Bid - In a premium bid tax lien bidding system the county awards the lien to the investor who bids the highest amount over the lien amount. There are five basic ways in which a county may pay out the winning lien holder if the tax lien is redeemed.

  • Both the premium and the lien amount receive the same interest
  • The premium and the lien both receive interest, but at different rates
  • The lien amount receives interest and the premium does not
  • The premium receives interest but the lien does not
  • The premium is lost(not paid back at all), and the lien receives interest

Random Selection - The county official randomly selects a bidder number and asks if that investor wants the current lien up for sales. If that bidder declines they will then select another number. If no one takes the lien in successive tries they will offer the lien to anyone interested. Methods of random selection will depend on the budget of the county and the number of bidders. Many counties may switch to this method if they fall behind in sales and need to finish off a high number of tax liens before the auction must end.

Rotational Bidding - Each investor receives the same number of chances to purchase a lien. The county official goes down the list of bidders in order, starting from number one, asking each if they would like to purchase the current lien, until a bidder says yes. The next lien is then offered to the next bidder on the list, regardless of how many bidders they had to go through before someone bought the lien. Again, you do not lose a turn for declining to purchase a lien that didn't start with you. This system may hurt you in the short run if you are offered a lien you can't afford, or one not worth purchasing, but in the long run it is the most fair way to do it.

Over the counter - Some states and counties will allow over the counter purchases after the sales has concluded. Any lien in inventory which was not purchased, can be. You will also receive the maximum allowed interest rate on the tax lien certificate.

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