Tax Lien Investing - Why bid a premium?

Question

Hi,

I participated in an online auction recently for tax liens. This was my first time doing this so I played things as safe as possible (bidding only the max possible of 18%, in nice areas of the town on properties that were not in foreclosure or pre-foreclosure). I was only bidding on liens that were $350 and under. Unfortunately, I did not win any of the liens, and when I saw the winning bid, all of them were premiums (ranging from $300 on a $130 lien to $1,100 on a $350 lien). I was wondering what the benefit of bidding a premium is since the property owner does not have to reimburse the premium of the lien.

Thanks!

Roy Oliphant · Answer

Hi @Chris B.

It really depends on the state and the goals of the investor.  You mentioned this was a Lien auction so I assume a number of the bidders were looking for decent returns. As Account Closed mentioned, an overbid might be because these investors are willing to accept less than the maximum interest.  Another strategy is to bid on liens that are less likely to be redeemed which MAY result in the investor having a path to owning the property.  In that case, the bid may not even consider the interest and only be focused on the property value.

Roy Oliphant · Answer

It really depends on the jurisdiction and how they handle it.  For example, some states have a multi-year redemption period.  If your premium goes below 0, there may be a chance that the second year will provide some return and you could calculate that over the two years for an actual rate.

BTW: even if you are only bidding for interest, you need to plan an exit strategy that includes what happens if the property does not get redeemed.  For example, I would not generally take a lien on a old chemical storage site.  It might not get redeemed and then you could wind up on the title and responsible for an EPA mandated clean up.  ALWAYS know what you are bidding on and what your strategies are.

Will Sifert · Answer

I am bidding in Colorado right now which is a premium bidding state where the premium amount is NOT returned and you don't make any interest on it.  Several cheap tax liens are being premium bid for more than the amount of the lien. For example people are bidding $400 for a $200 tax lien. The only reason it is done in this case is because they are hoping the property doesn't get redeemed and they can get a deed. The county treasurer's office is making a fortune as they get to keep the premium bids.

Kevin Schaefer · Answer

@Chris Laino where are you bidding on the Liens for NJ? Somewhere online?

@Joseph Suarez I literally just listened to podcast 56 yesterday (56 down, hundreds to go!) and it was awesome. Especially because I live in NJ!

Account Closed · Answer

Looks like the bidder who pays a premium is doing so because they are happy with a lower return than 18%. So if you are owed $23.4 on a $130 lien (18%), and someone pays $300 for it, then they are happy with an 8% return (23.4/300).

I know NJ also has unique rules around the winner in certain circumstances getting the right to collect interest on subsequent tax payments without having to go to auction. Maybe a NJ investor can chime in on that piece

Joseph Suarez · Answer

@Chris Laino

If you haven't yet, listen to podcast 56 with Ankit Duggal. Great podcast on tax lien investing in New Jersey. There are some good books too, Profit by investing in real estate tax liens by Larry Loftis, and The complete guide to investing in real estate tax liens & deeds by Alan Northcott.

From what I have read, if the Interest is bid down to zero and you pay a premium, then you get 0% interest in the first year, but you can choose to pay off subsequent taxes at the full interest amount. There is also a  penalty ranging from 2-6 % depending on the amount of the lien certificate in some municipalities. I am curious if the premium bid is ever recovered once the lien, interest and penalties are paid.

Anthony Genovese · Answer

@Angel Goo , Yes the premium is returned to the investor unless the property is foreclosed on, or after the certificate expires after 5 years

Shaya Deaton · Answer

Does the investor only buy the premium bid one time, and the owner has 3 years to repay that single bid?

Or does the investor continue to pay the taxes annually for 3 years to capture the property?

Chris Laino · Answer

Account Closed If an investor buys at a premium, does the interest get deferred to year 2, and if so at what percentage? Also, if the property owner pays right away, wouldn't the investor technically lose money since there is no interest being paid?

Thanks!

Will Sifert · Answer

If the lien is redeemed, the tax lien purchaser gets the premium amount back correct? Does he also make interest on the premium? Is there a cap? If the lien is not redeemed and a deed is issued to the tax lien buyer, does the county keep the money or does it go to the original owner that lost the property ? Thanks!

Tax Lien Investing - Why bid a premium?

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