Small Change in Indiana Tax Lien Sale System Means Big Changes At This Fall's Auctions?

Indiana recently passed a minor change to their tax sale system. 95% of it remains the same - but it may never be the same again.

In the "tax sale investing world", little changes made by the state can result in monumental differences in how the sales will operate moving forward.

The change? The return to tax sale investors for part of their bid has been reduced from 10% per year to 5% per year.

How could a small change like that - a 5% reduction on part of the bidder's investment, shake things up so much? Read on.

How Indiana Tax Liens "Work"

Indiana has a tax lien system. So the county sells a tax lien on each delinquent property to any investor who is willing to pay the amount of taxes owed, and the investor receives a tax lien against the property for security. The owner then has a strict one-year period to repay the late taxes they owed, plus a return to the investor.

If the owner fails to do this, the investor can trade in the lien they purchased for free and clear ownership of the property.

Which, of course, means the owner loses the property.

If the owner repays the taxes in the first 6 months, they must pay the investor a "flat" 10% return on the amount of taxes owed - even if they pay the day after the sale. If the owner pays 7-12 months after the sale they must pay a "flat" 15% return on this amount, whether they pay in month 7 or 12.

So the investor earns at least 15% annual return on the lien, on the amount of taxes's what the annual return (APR) is for the investor if he's paid off within:

Some "Monster" Returns!

1 day: 3650%
1 month: 120%
3 months: 40%
6 months: 20%
6 months and 1 day: 30%
12 months: 15%

Now of course if the investor is earning 3-digit rates of return, it's for a relatively short time. However, the funds are then available to invest again (perhaps several more times) before the year is up, at other sales.

So it's for real.

"Hey, I Want to Buy That Lien Too!"

Since the county is offering the chance to get properties for the cost of just a year or two of taxes (and offering a good return on the investment if the property isn't obtained), many investors often want to buy the same lien.

When this happens, the county accepts higher and higher bids for the lien until one highest bidder remains. All the additional money the county takes in when competitive bidding occurs on a lien, is called an "overbid".

The county sets this overbid money aside in an escrow account during the one-year period the owner is allowed to repay the taxes.

If the owner wants to pay the lien off, they must now pay the flat 10% or 15% on the taxes they originally owed, and ALSO pay the investor interest on the "overbid" they have deposited with the county.

Even if that overbid was $200,000 or $1,000,000.

Annual Percentage Rate For Overbids

However, the interest payable on the "overbid" portion of a bid, is not a flat percentage like what the investor earns on the taxes actually owed. It's calculated on an "annual" basis.

So the investor earns a little bit every day, not the whole thing upfront, on any "overage" money he had to deposit to win the lien.

Likewise, if the owner pays off their lien in 1 day, they only pay one day of interest on the overbid portion. Which is next-to-nothing for even a large overbid. If they pay the lien in 3 months, at least they're only paying 1/4 of one years' interest on the overbid amount.

Indiana Overbid Rate of Return Falls from 10% Annually to 5% Annually Starting Now

We've now come full circle - the change is a 5% drop in the interest earned on some of the amount bid... on some of the liens sold at a typical sale

Previously the owner had to pay 10% interest annually on the overbid.

Now that amount has dropped from 10% to 5%.

That's all that happened?

That's the main change of any substance. And yes, it should have a huge impact on everybody who invests at the sale!

The Contest:

Answer this "simple" question:

Why is this going to make such a big impact, and which "tax sale players" will be affected?

The best answer (in my sole opinion) wins. Just comment below.

NOTE: You will only see your own answer when you submit it, until the contest is over. Nobody else will see your answers and you will not be able to see theirs (no copying!).

When the contest is over this weekend, I'll announce the winner and unblock everyone's answers.

Some hints and points to ponder:

  • Indiana tax sales have been known for very high overbids - the total bid for a property is very often more than the property is worth. And the each county usually receives many times more dollars at the sale in overbid money, than the taxes actually owed (though most of these overbids are returned to the investors as the tax liens are paid off)
  • While the amount earned on the taxes owed remains the same, the amount earned on overbids has dropped from 10% to 5%. Which parties are likely to "win" due to this change? Which parties are likely to "lose" due to this change? How do you predict behavior of the auctions will change?
  • What investing objectives might different investors at an auction have? Who would you guess has been putting in all those huge overbids in previous sales? What big opportunities could arise? Who might pack their bags and go to other states entirely?
  • What conditions allowed and encouraged those huge overbids to make sense, that now may not exist?

Looking forward to your comments and will try to respond to everyone I can. Over the next few days we'll go over all the ramifications of this change, why such a small change could impact the auctions so greatly and most importantly, how you will be able to use it to your advantage no matter what your goals are!

Rod collier June 1, 2016 at 11:58 am

The bidders who primarily want to earn the interest will be the ones going to other states The bidders who want to get the property will have less competion and overbids will be much smaller

Rick Dawson July 19, 2016 at 4:20 am

Yes and no (that's what I would have guessed before seeing what happened)

Bidding was not quite as fierce after the change, yes.

Turns out banks are still pretty happy with 5% though when they are paying .25% - because the high overbids on the best properties were not noticeably lower!

joe werle August 20, 2016 at 12:17 pm

I suspect there are two types of 'overbidders' A. a rehabber or local neighbor who really wants that single property and hopes that the owner does not redeem the lien. The will settle for the interest on the deliquency and bid the overage up to what may be considered a discount price to get the property. B. The deep pocket investment funds who spend huge sums hoping the average return will balance out to 5-10%. I think the single bidder will still be there, but the overall return for the large investor just dropped by half. I think they will go elsewhere. If you can't make 10% in todays boom market your missing out. There are other ways to get bargain properties.

Rick Dawson August 31, 2016 at 11:00 am

"Bidding the overage to what may be considered a discount price"? In other words, bidding prudently?

The deep pocket investment funds are definitely what can make the environment tough. In my state, until recently, they would earn a full 10% on the overage funds so they would really bid things to insane levels.
Now that it's 5% it makes sense for them to bid to a point but as that return approaches 5% with a huge overbid, I don't think they have the earnings to cover their big losses suffered by bidding too high and getting the property.

They stay away from the smaller-priced stuff as a result ($1-5k minimum bid) much of the time. This is where the small investor can bid with small overages and get 10%+ OR access to the property worth 15-30k. Not bad.

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