7) Tax Lien and Deed Auctions

Let’s take a look at the different ways to purchase tax liens and deeds.

Tax liens or deeds can be purchased using one of the following methods:

  1. Live Auctions
  2. Live Online Auctions
  3. Over-the-Counter
  4. Secondary Market
  1. Live Auctions

This is the oldest and most common method to purchase tax liens and deeds.  County officials schedule the auctions, unless the state stipulates otherwise.  When we invest at live, on-site auctions, we actually go to the county courthouse and bid on properties alongside other investors.  Before attending the auction, you would register for it, pay a deposit determined by the county or state statutes, and then you would be assigned a bidder identification number.  Make sure to check with the county about any registration deadlines and deposits long before the auction.  

When you attend the auction you sit or stand in a designated area and wait for the auction to start.  An auctioneer stands at the front of the room and reads off an identification number for a property, one at a time, which is usually the parcel number for the property, and then the bidding begins on that property.  The auctions are public so there may be quite a few people there.  The level of competition at the auction largely determines your success.

  • Live, Online Auctions

Online auctions proceed like a live, on-site auction, except it all happens on your computer.  Before the auction starts, you should go to the website, register for the event, and download the updated list from the site.  When the auction begins you simply bid by clicking your mouse button rather than raising your hand like at an on-site auction. Most counties will use one of two auction software companies, and both operate similarly by providing the entire list of available tax liens. To bid, you would enter your lowest bid at any point during the auction window (10am – 4pm, for example), then when the auction completes at the designated time, the software automatically finds the lowest or highest bidder, depending on the bidding method, and the tax lien is awarded to that bidder. If more than one person bid the same amount, then the software performs a quick lottery to randomly choose the winner from those with the same bid amount.

The advantage of an online auction is that you can participate from the comfort of your home.  You can do most of the research from the comfort of your home and also many of the online auctions will have the property information easily accessible – usually just by clicking on the tax lien or deed that’s being offered at the online auction, you can pull up much of the crucial information that we are interested in.

  • Over-the-Counter

Buying over-the-counter tax liens and tax deeds means buying the investments that were not purchased at the auction.  They are the leftovers from the auction.  It is possible to buy over-the-counter tax liens, deeds, or redemption deeds.  However, it is most commonly allowed with tax lien certificates.

To participate, you simply wait for the auctions to end and for the county to audit the list and make available left-over tax liens available. Then you research the list and make your purchases either through the website or directly through the county, depending on the method used by the county. Remember that over-the-counter investments were passed on by all participants at the auction, so due diligence is crucial here. A good thing about them, though, is you are not bidding down the interest rate, and you’ll receive the full state-mandated interest rate on every over-the-counter tax lien.

  • Secondary Market

The Secondary Market is the rarest method for purchasing tax liens and deeds. It’s very rare to find redemption deeds, but tax liens and tax deeds are readily available. The Secondary Market are tax liens and deeds that were purchased at the auction by investors, but are then traded to each other afterwards, usually among large or institutional investors.

Every investor has a different strategy or appetite, so it’s hard to determine why they would want to sell portions of their portfolio, but here is a primary example that we encounter.

Most large investors are investing simply for the interest. For example, let’s imagine that Chase Bank has billions of dollars, which they do, let’s also imagine that they got that money essentially for free through deposits from their customers, which they do, let’s also imagine that they invest in Florida where the state statute established a minimum penalty of 5 percent no matter how long the certificate is held before redemption. So if it was purchased on Friday, and paid off the following Monday, the investor gets 5 percent. So large investors will often focus on tax liens that they know will pay off quickly in Florida, they’ll invest hundreds of millions of dollars, receive many quick redemptions, then they will liquidate the remaining portfolio on the Secondary Market.

The Secondary Market is available by working directly with these institutional investors or through multiple brokers.

Bidding Methods

Counties typically use one of a few bidding methods at their auctions; premium bidding, bidding down the interest rate, bidding down the percentage of ownership, rotational bidding, and random selection. We will discuss the three primary methods here.

Premium Bidding

This method is the most commonly used method by tax deed states. 

The premium bid method is similar to what you would expect at a typical auction.  The price starts at the delinquent tax amount plus fees then the purchase price is bid according to competition of the bidders. Depending on the competition at the auction, the price could remain very low or it could be bid up fairly high.

The amount that the property is bid above the base amount is known as the surplus.  If the opening bid starts at ten thousand dollars and the investor ended up paying fifteen thousand dollars for the property, then that additional five thousand dollars is the surplus, and the surplus usually goes to the previous property owner.

If investing at an auction using this method, make sure to set a maximum price you’re willing to pay and don’t exceed it. It’s important not to get caught up in the excitement of the auction, stick to your previously performed due diligence and maximum bid numbers, and hopefully they are reasonable according to the competition.

Bidding Down the Interest Rate

This is the most common method used in tax lien certificate states.

This system uses the interest rate that the investor earns as the bidding medium.  The bidding starts at the maximum rate of return that the state mandates and then that rate is bid down incrementally by interested investors.  Florida, Arizona, and other large tax lien states use this method.  In Florida the bidding starts at 18% and bids are accepted in .25 percent increments all the way down to .25 percent.

If attending an auction that uses this method, make sure to set your baseline interest rate and don’t bid below it. 

Bidding Down the Ownership 

This is a less common bidding method, and for good reason.  This method uses the ownership of the property as the bidding medium.  The bidding begins at 100% property ownership and then works down 1% at a time until the bidding stops.  After the sale, the investor would own whatever percentage he or she bid to, and the previous property owner would retain the remaining percentage. 

If used in a tax lien state, the ownership would only apply after the redemption period ends and the investor attempts to take ownership of the property.  In order to settle the difference, the investor would have to settle with the previous property owner.

This bidding method is very rare and a little bizarre.   

Forms of Payment 

Most counties will require payment for any tax liens or deeds within twenty-four hours of the auction.  Online auctions will require that you entire banking information before the auction, and they automatically pull the money from that account. Otherwise, the counties will require certified funds, bank checks, or cash and the balance needs to be paid typically within 48 hours.