There are several methods for puchasing tax lien certificates and they vary from state to state and even county to county. Each method has its advantages and disadvantages. The methods used for selling certificates in most states are:
• Bidding down the interest rate
• Bidding a premium or bonus amount
• Bidding down on a percentage of ownership
• Bidding up the purchase price
Bidding Down the Interest Rate
This type of sale is like an auction. When a tax certificate is offered for sale, the bidding starts at the rate designated by the county or municipality holding the sale. The interest rate is then bid down, usually in increments of ¼ of one percent, until the certificate is sold to the lowest bidder. Purchasing tax certificates using this method can affect the outcome of the yield. Some of the things that need to be determined prior to purchasing a certificate with this method is how low you are willing to go on the interest rate. If you’re not careful, you could wind up bidding away the profit.
Bidding a premium or bonus amount
In a sale that uses the premium or bonus amount for bidding, the successful bidder is the one who offers the largest cash amount is excess of the amount due on the delinquent tax. This method of buying tax certificates can also have a substantial effect on the yield. Prudent judgment and research are crucial to making profits using this method.
Bidding down on a percentage of ownership
The advantage to buying tax certificates in areas that use this method is that the maximum yield is not affected in the process of selling it. The bidder who agrees to pay the amount of delinquent tax, interest, and other costs, plus accept a reduced ownership of the property in the event of foreclosure, becomes the successful bidder. When a tax certificate is purchased in this manner, the investor becomes a “tenant in common” with the owner. This is the disadvantage of using this method. If you chose to forclose on the property, the original owner retains an interest in the property. You cannot have full possession of the property unless the owner agrees to relinquish his portion.
Bidding up the purchase price
The opening bid at this type of sale is set at the amount of delinquent taxes, plus interest, penalties, and any other costs. The tax certificate is sold to the bidder willing to pay the highest price. To redeem the deed, the property owner must pay the price of the highest bid.
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