SKW Central - 5 things to remember

Five Things to Consider Before Bidding at a Tax Lien/Deed Auction

In most counties the interest rate being offered to potential investors at a Tax Lien/Deed auction is bid down during a bid-down process, which is the process of establishing a final interest rate by allowing registered bidders to bid on the interest rate. The bidding down process is usually done in 1% increments and typically starts quite high. The winning bid goes to the investor willing to bid the lowest.

How low will you go?
How low you are willing to bid is up to you, but it is important to consider the opportunity cost of your money compared to other investment vehicles available to you. Get out your calculator. The numbers will tell you how low you can go and still make a profit. Whatever your decision is, decide before the auction starts to avoid getting auction fever and buying with emotion. That’s a great way to lose money, and happens quite often, especially to beginning investors anxious to buy their first Tax Lien Certificate or Deed.

Redemption Period
The second thing to consider about the auction process is the Redemption Period. Depending on the county you’re working in the Redemption Period could vary from one to four years. This is one very important thing you will want to pay attention to as it may not make sense for you to have your money less liquid during that time period. It is important for you to figure out what the cost of your money is, for instance, if you’re buying the lien certificates on a credit card, does that make sense for the long term?

Early Redemption Penalty
Many counties have an Early Redemption Penalty which means home owners have to pay a penalty if they redeem their taxes early, usually within one year. For example, if the county charges a 5% penalty for early redemption and the homeowner pays off their back taxes in a month, they will have to pay the 5% penalty in addition to their back taxes. If you’re able to collect on these types of certificates month after month you could see a nice annual return. This strategy may tempt you to bid lower on the interest rate, so get your calculator out. Also keep in mind that many homeowners drag out paying property taxes until the very last minute, which is another risk factor to consider.

Institutional Bidders
You may encounter Institutional Bidders at these auctions, especially in large counties with a lot of activity. An Institutional Bidder is a representative sent by an investment firm to purchase investments for their clients. These could be mortgage banks or investment firms with a huge bankroll to spend, and they know their stuff. They typically target a return of about 7-11% for their investor clients. They are aggressive, and they tend to drive down interest rates in their bidding methods. There’s not a lot we can do about them other than be aware of their existence, and you might possibly choose to compete in a different market if they are taking over the auctions you want to attend.