How to Bid on a Tax Lien
A tax lien is a lien against property for back taxes owed. Liens can be placed by your local or federal government. The most common type of lien is on real estate for failure to pay property taxes. After you contact the local tax collector and/or property tax office for a list of tax lien properties, then you need to make a bid. The challenge for most people is understanding the bid process. There are two main types of bidding: Premium Bidding and Percent Bid Down Method.
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Instructions
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Understand the auction process. There are auctions for tax liens and tax deeds so make sure you're in the right one. Each property has a starting bid, and the auctioneer will help to facilitate the bidding process. Bid cards are used to make bids, and the property is sold when there's only one bidder left.
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Learn Premium Bidding methodology. The "Premium" refers to the amount over the minimum bid. For instance, if the tax lien has a minimum bid of $500, and an investor will pay $505 for it, the premium is $5 ($505 - $500). It is not uncommon to see a bid go up to 80 percent of the assessed value of the property.
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Learn the Percent Bid Down Method. This is less common than Premium bidding. In these bids, the bid is not for the dollar amount of the tax lien certificate, but rather the rate of interest the investor (bidder) is willing to accept for the loan given to the investor for back taxes. In this case, the percentage bid actually gets lower instead of higher.
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Walk through a Percent Bid Down Method Example. Each state has a maximum rate of interest that tax lien investors can charge homeowners on the loan for back taxes. In Arizona, the maximum rate of interest is 16 percent per year. The opening bid in a Percent Bid Down auction in Arizona will probably start out at 16 percent. The more people like the property, the less interest they will accept on the loan. So the next bid will be 15 percent, and then 14 percent, and so on, until only one bidder is left.
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