Tax Lien Auctions - The 4 Major Flavors

Tax Lien Auctions and Their Formats - Right Here!

Tax Lien Auctions Are Conducted in Several Major Formats - Here They Are!

Tax Lien Auctions: What Are the Major Formats?

Tax lien auctions are conducted differently in each state.

Though it's common to see two states with seemingly identical tax lien auctions, there are always at least minor differences.

For example, South Carolina and Indiana tax lien auctions are very similar. In each case, the state auctions a tax lien and allows competitive bidding.

The owner has exactly one year to pay the tax lien off (called a redemption period) in either state. Interest rates even end up being similar even though they're paid out differently.

However, there are likely different rules about sending notice to the owner and interested parties. And the process to get a deed after the redemption period ends is almost certainly different between the two tax lien auctions.

Takeaway: Any time you invest at tax lien auctions in a new state, take the time to learn ALL the details even if it resembles another state you've familiar with.

Tax Lien Auctions?

In the strictest sense of the word, there are only a few states that have true tax lien auctions. In this format, the sale price of each lien is bid higher until a winner is determined. Indiana, South Carolina, and Alabama are among those few states.

The county holds on to any extra money (overbids) collected at their tax lien auctions in an escrow account. Overbids are returned to the tax buyer if the owner redeems.

If the tax buyer ends up acquiring the property he DOES NOT get any return of his overbid, just ownership of the property.

Therefore it's important not to pay more for a lien than you'd be willing to pay for the property itself.

Owners are entitled to collect any overages on hand, if they lose property at these tax lien auctions.

In other states, no overages are collected. This can lead to some inequities.

What's Fairest?

As imperfect as tax lien auctions with a "bid up" format can be, they're actually the fairest for all.

  • Bidders all have a fair chance to buy any lien they wish
  • Because price is bid up on valuable properties, there is almost always a surplus on hand to at least partially compensate owners for a loss of their property
  • Bidders still earn good interest on their entire investment, including any overage, so they will freely invest until the property value is approached
  • Bidders can "park" huge sums of money at these sales. Therefore competition is fierce. The result is that bids go higher, and any owners losing a property are more likely to at least have an overbid

The main problem with the "bid up" format is that the owner of the property may be subject to HUGE redemption amounts depending on the price paid for the property.

For example, an owner may owe $10,000 in back taxes and a lien against his property may then receive a bid of $250,000. In Indiana, a "bid up" state, his redemption amount will shoot from $10,000 to over $35,000 in just one year! This is because the tax bidder is entitled to roughly 10% interest on the entire sum invested, or $25,000.

Add in other miscellaneous costs and penalties and the amount will approach $40,000 in this example. Properties that receive high bids at tax lien auctions are therefore more difficult for owners to redeem.

In a continuation of this post, I will cover the other formats of tax lien auctions, and their pros and cons.

Want my 50-state pack of "Cheat Sheets" that sum up each state's tax system? To get it, just "Google +1" me and you'll be sent right to the download page! It's that little grey button just below this post with a "+1" on it.

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