What is a Tax Lien Premium?

What is a Premium in Tax Liens?

A premium is the difference between the purchase price and the opening/minimum bid of a property at auction.

How Premiums Work at Tax Lien and Tax Deed Auctions

After bidding down the interest rate, bidders will frequently bid a premium in order to win a tax lien or tax deed. This extra bid amount can make an investor’s offer more competitive, but it also changes the math behind the investment. Before placing a premium bid, investors should consider whether the potential return still makes sense after accounting for the additional upfront cost.

Premium vs. Overbid: Is There a Difference?

In tax lien investing, premium and overbid are often used to describe the same basic idea: paying more than the delinquent taxes, interest, penalties, and fees are worth in order to win the investment. The exact meaning can vary by state or municipality, but both terms usually refer to extra money paid above the minimum required bid.

You must be careful when bidding at a premium for tax deeds because it can limit your profits. Don’t let getting caught up in the moment of “winning” reduce the return of your investment. Tax lien overbidding can lead to losses if you aren’t careful.

What Happens to the Premium After Redemption?

What happens to a tax lien premium after redemption depends on state law. In some states, the investor receives the premium, or “overbid”, with interest or penalties when the lien or deed is redeemed. In other states, investors do not get the premium back when the lien or deed is redeemed and is instead retained by the municipality or taxing authority. Certain states, such as New Jersey, hold the premium and is only returned if the lien is redeemed within a specified period (5 years in NJ); if the lien is not redeemed within that period, the premium is forfeited.

Why Premium Rules Matter for Tax Lien Investors

Understanding and playing by premium rules for tax liens is the difference between making a profit and losing money. You’ll be able to separate profitable investment opportunities from the risky ones.

Stay up to date on any changes in New Jersey’s tax lien laws, as even the smallest change can have a significant impact.

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