Tax Lien Auctions explained

Tax Lien Auctions explained

In the US if a property owner does not pay his property taxes the government will take that property away from him either through a Tax Lien Sale and subsequent foreclosure of the lien or through a Tax Deed Sale.

Tax Lien Sales are a common way in many states for counties to get their Property Tax Dollars released to them. And it is a great way for Investors to earn an excellent interest rate on their investment backed by the Government and valuable real estate worth many times their investment. And the investor has the chance to actually own the underlying property for only the back taxes of a few years plus some foreclosure cost.


How do Tax Lien Sales work:

About 4 weeks prior to a scheduled auction by law the county (or in some cases the state) needs to publish a list in one newspaper of common circulation of all properties scheduled to come up for auction. Nowadays this list is usually also available online for free.

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Anyone can obtain the list by either going online to the county webpage, or by getting a copy of that day’s edition of that newspaper, or by asking the county for a copy of the list in form of CD (for which there is usually a small fee of a few dollars).

The public now has 4 weeks to do the proper research on these properties and decide which one to bid on.

In order to bid, the bidder needs to usually fill out a form and get a bidder number. Some counties require this to happen a few days in advance but some allow you to do this on auction day.

In many cases also proof of funds needs to be submitted on auction day or a few days in advance however since the Dollar amounts dealt with in Tax Lien sales are less than in the Tax Deed Auction world, the cash requirements are usually much lower. .

Once you are registered for the auction you will receive a bidder card and a bidder number and then you are allowed to bid. Please make sure to call the county of your choice prior to such an auction to make sure you know what you need to bring.

Tax Lien Auctions have one specialty in that the bidding often is not on the actual dollar amount of the Tax Lien Certificate (although there are auctions that work like that) but instead the bidding is on the Interest rate and in addition the bidding goes backwards meaning downwards.

For Example: If a Tax Lien for $1000 comes up for auction in a state where the highest interest rate is 16%, the auctioneer will start the bidding at 16% and if there are more than one bidder, he will proceed to lower the interest rate to 15%, then 14%…. until there is only one bidder left or until the interest rate reaches 0%.

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So basically the Tax Liens are auctioned off to the bidder who is willing to accept the lowest interest rate for their investment.

At the end of the day or once you are done bidding and have declared the winning bidder on one or many properties you go to the cashier’s, pay the amount of the Tax Lien Certificate and then will receive a Tax Lien Certificate from the county (usually by mail within a few days).

Then you wait until the owner either redeems the Tax Lien Certificate and you get your investment back plus the high interest rate or you purchase the subsequent years of back taxes (once they are delinquent) and wait until the Redemption period is over and start foreclosure on the property.

Either way you will get your money back plus a very high return which in the case of you getting the actual property can be in the 500% to 1000% range. But even 16-24% for just interest is not bad at all considering that this is one of the safest investments the US market has to offer.

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