Today we’re going to look at what types of real estate auctions American counties use to sell their Tax Lien and Tax Deed certificates.
Tax liens and tax deeds are usually sold through real estate auctions. However, not all auctions are conducted in the same manner. Many counties use different systems to sell their property or Tax Lien certificates. Let’s take a look together at the most commonly used real estate auctions and how they work.
Bid Down the Interest Rate
This method is used primarily for the sale of Tax Liens, and is also one of the most commonly used methods. The auctioneer starts the auction with the maximum interest rate offered by the government. The auction is conducted by lowering the interest rate by 0.25% with each bid. Whoever is willing to accept the lowest interest rate wins.
This type of auction is most commonly used by counties offering their Tax Lien online. Registering is quick and easy and will allow you to search and purchase Tax Liens right from your home!
In counties where competition is fiercest, it is easy to see the interest rate reduced to near zero. Often these are large investment banks, hedge funds, and large capitalists who are “satisfied” with a lower interest rate by investing huge amounts of capital. In this way they try to eliminate the competition, having more capital at their disposal. They choose the larger counties because they have more tax liens to offer.
So how do you avoid auctions where the competition is stronger?
Simple, by participating in smaller county real estate auctions where the competition is less fierce and you can often purchase excellent tax liens.
Premium Bidding (Tax Deed & Tax Lien)
In this type of real estate auction, the bidder adds a premium (an amount of money) to the base price of the tax lien. Generally, in most counties that use this type of auction, the increase is $1. Obviously, the bidder with the highest premium wins.
All states that use Premium Bidding use one of these methods to determine the interest on the premium:
- The premium and the tax lien receive the same interest rate.
- Both the premium and the tax lien receive an interest rate but in different percentages. The interest on the tax lien will be higher, while the interest on the premium will be lower.
- The interest rate accrues only on the tax lien and the premium receives no interest.
- The premium receives an interest rate, while the tax lien does not.
- The premium is entirely lost and will go into a fund managed by the county.
- It is always a good idea to read the information notes on the county’s real estate auctions you want to attend. The notes will include all the details and rules of the auction.
Each method described above has its advantages and disadvantages. even when the premium is lost in full, the county will often give you a right of first refusal on the purchase of the next year’s tax lien. On the same property, at zero premium and with the maximum interest rate offered by the state. New Jersey and Colorado are states that adopt this method.
Rotational Bidding
This is a very nice and simple type of auction. In rotational bidding, everyone has the same chance to buy a tax lien. Here’s how it works: Each bidder is given a number. The county clerk begins the auction by asking Investor #1 if he or she would like to purchase that Tax lien. If No. 1 refuses, it moves on to No. 2 and so on until someone wants to buy that Tax Lien.
Let’s say the Tax lien is purchased by investor #4. At this point, the county clerk resumes the auction, offering a new Tax Lien, this time starting with investor #2. No one loses their turn, even though in the previous Tax Lien, as in the example, #2 and #3 had rejected the first Tax Lien.
Obviously, the system is very simple and works with great efficiency and fairness. The only negative point is that the investor does not have control over the Tax Lien that is proposed to him: it could be a $200 one or a $28,000 one. In addition, auctions can take several days depending on the number of Tax Liens the county has to sell.
There is no way to determine a priori which Tax lien to choose. Also, if the investor rejects the proposed Tax lien, it may take some time before it is his turn again.
Random Selection
In real estate auctions held in Random Selection mode, the county clerk takes a number at random from those assigned to the auction participants. The selectee will be asked if they wish to purchase the Tax lien being sold at that time. If he/she declines, the county officer will select another number at random, and ask that person if he/she wishes to purchase that Tax lien. And so on…random, i.e., random selection.
Bid down the Ownership
In this type of auction, the investor agrees to lower the percentage of ownership on the property. The auctioneer will start the auction with a 100% ownership percentage of the property, and then lower this percentage with each bid. The investor who is willing to accept the lowest percentage of ownership will be awarded the Tax Lien.
While in the other Tax Lien auctions that we have seen, the underlying asset that is given as collateral, i.e. the property is always for full possession (100%) of its value. In this type of auction you will not have full possession of the property but a lower percentage.
This means that if the owner does not pay the Tax Lien, the investor can initiate the foreclosure of the property, but in order to sell it and recover his investment he will have to contact the executor and negotiate the missing percentage to obtain full possession of the property. This is a very complicated operation, since the executor will not be happy to satisfy his repossessor.
To give an example. If we were awarded a Taxlien with 90% possession, if the owner failed to pay the back taxes, we would have to pay him 10% of the value of the property to get full possession and be able to sell the property.
I do not recommend venturing into this type of auction, it could be a nightmare to get back possession of your investment.
Fortunately, these types of property auctions are not very common and are slowly disappearing. The counties that used to offer them have switched to a simpler and more intuitive auction model, choosing from one of the above.
Over the Counter
This is the method that I personally prefer. Here, there is no competition and you do not participate in any auctions. Over the counter, are Tax liens and Tax deeds that have gone unsold during the auction and are offered by the county directly to the investor with the maximum interest rate provided.
Tax liens and tax deeds over the counter can be sold online or by applying to the county. All the investor has to do is to choose the Tax Lien or Tax Deed he/she likes the most and buy it.
Do not think that unsold Tax Liens are discarded or of little interest, on the contrary, sometimes you can find real “pearls” and you can buy them directly from your home.
Auction with price increase (Traditional Bidding)
This type of auction is most commonly used in Tax Deed auctions. The auctioneer starts with a base bid amount, which is determined by the total amount of back taxes, plus expenses incurred by the county to advertise and notify the executor. With each raise, the base bid amount will increase until there is no one left among the investors willing to raise the price. At that point the highest bidder will be awarded the Tax Deed.
This type of auction is also used by the Italian courts to sell foreclosed properties. Care must be taken not to let one’s ego prevail during the bidding process and to compete with other investors so as not to run the risk of overpaying for the property.
Always remember that you make money when you buy, not when you sell.
This is a concept that you must keep in mind. It will make the difference between making money or losing money when you resell your property. With this “pearl” I greet you, if you have questions or comments write them below, I will be happy to answer.
Until next time and good profit to all….