Types of Bidding

Even though there are just two types of tax sale auctions (lien certificates and tax deeds), there are several different ways that the bidding can occur. There are five main types of bidding which are explained below. Keep in mind that there may be variations from county to county.


1) Premium Bid:

Some counties will have the bidders bid up the amount paid for the property. Usually, the bidding will start at the amount of taxes, interest, penalties, and fees due (the lien amount) and then any additional bidders would have to bid more than the lien amount. The “premium” is the amount paid over the lien amount. Sometimes counties will treat these two amounts differently. For example, they might:

- Assign the same interest rate to both the lien amount and the premium.
- Assign one interest rate to the lien amount and a different interest rate to the premium.
- Assign an interest rate to the premium and no compensation on the lien amount.
- Assign an interest rate to the lien amount and no compensation on the premium.
- Specify that the premium is lost (meaning that the bidder does not receive his/her principal back on any premium paid).

Since these variances can affect your overall rate of return, you want to know beforehand how it works so that you can set your maximum bid for each property accordingly.


2) Bid Down the Interest Rate

With most lien certificate sales, the bidding is for the interest rate you will get if you are the winning bidder. You will pay to the county the amount of taxes, interest, penalties, and fees due and get the interest rate on that amount (in most cases).

An example of this type of bidding would be the following:

Let’s say that the interest rate on tax lien certificates is set by the state at 18%. If a property has taxes, interest, penalties, and fees of $1,000, the winning bidder would pay $1,000 to the county. The interest rate they would receive when and if the property owner pays them back will be determined in the bidding process. The interest rate starts at 18%. So the first bidder will promise to pay the amount due in exchange for the 18% rate. The next bidder would need to pay the same amount for a lower interest rate, say 17 ½%. The next one might go to 17%, etc. until no one is willing to go lower.


3) Random Selection:

In a random selection bid, a property is announced and then a bidder is randomly selected (either by a computer or by drawing bidder numbers). If the selected bidder wants that lien, he/she can take it. If not, another bidder is randomly selected until someone is found that wants the lien.


4) Rotational Bidding:

With rotational bidding things proceed in an orderly fashion. The first property is announced and bidder #1 gets a chance to take the lien. If he/she declines, bidder #2 has the chance to take it, and so forth, until someone takes the lien (or until it is determined that no one wants it). Then property #2 is announced and bidder #2 gets the first opportunity to take the lien (even if bidder #2 took the first lien). The bidding proceeds the same way through each of the properties being offered.


5) Bid Down Percentage of Ownership:

Other counties will have the bidders bid down the percentage of ownership. In these cases, the amount paid will always be the amount of taxes, interest, penalties, and fees. This way the county collects what is due to them. The bidding starts at that amount in exchange for 100% ownership of the property. It will then proceed downward (for example, the next bidder may be willing to pay the same amount for 90% ownership, the next bidder for 80% ownership, etc.). The bidding stops when no one is willing to accept less ownership than the previous bidder for the amount due.

The first auction I went to functioned this way. We got 35% ownership interest in one home and 40% ownership interest in another home.

The thing to be aware of when the bidding happens like this relates to what restrictions might apply if you get less than 100% ownership. For example, if you get less than 100% ownership the question is - do you have the right to sell the property or force a sale in order to collect your profits? What is the process for doing this? What is your relationship to the other parties who have partial ownership? Sometimes you may just have to wait until the property is sold to collect your share. This could be a big downside so be aware of the few places that bid this way.


Special Cases: Penalties

Florida is a special case because there is a minimum of a 5% penalty (not the same as an interest rate) to the property owner. The interest rate set by the state starts at 18% (which is 1 ½% per month. Normally, if the property owner pays you back in 2 months, you would get the amount paid plus 3%. However, since Florida has a 5% minimum penalty, even if the property owner pays you back early, you will still receive the amount paid plus 5%. Also, even if the bidding goes below a 5% interest rate, the winning bidder will still receive the minimum 5% of the amount paid on behalf of the property owner.

Texas is another special case because of how they assign their penalties. Texas is a redeemable deed state. This means that they sell the deed at the auction, but there is a redemption period of 2 years (for homesteads – someone’s primary residence and agricultural land – someone’s primary income source) or 6 months (for most other types of property). Instead of assigning an interest rate to be paid, the state sets the penalty at 25%. This means that no matter when the property owner pays you back (1st month or 23rd month), you receive the amount you paid plus 25% of that amount. So in Texas, you are hoping that either the person pays you back very quickly or that they don’t pay you back at all so that you can keep the deed to the property. However, even if you are paid back in the last month of a 2-year redemption period, on average you have received about 12 ½% per year simple interest!


Note: This module is intended as a general guide to how bidding works at different types of tax sales. Individual states and counties will vary in how the bidding is conducted and sometimes in what interest rate is earned on different amounts. It is your responsibility to check with each county before participating in the auctions to determine what your compensation will likely be if you are the winning bidder.


Assignment: For any county that you are interested in getting lien certificates or tax deeds, find out how the bidding is handled and determine how that might affect your profits and/or your ability to quickly sell the property.