Bidding Strategies for State Tax Liens

FinanceTax

  • Author Korprit Zombie
  • Published September 30, 2008
  • Word count 576

Once you get the when and the details of the terms for a state tax lien certificate or deed auction, you will want to use the list of unsold tax liens (or deeds) and begin investigating the parcels that they represent. Do not be concerned if you get with a list with several hundred properties, this will be a very nice problem to have as you will pretty much have a guaranteed tax lien to buy somewhere in that list, because after you get the hang of reading the details then skimming the list will become just like skimming through real estate advertisements. This similarity will make tax lien investing much simpler.

The immediate thing to do, once you are fortunate enough to find one of these tax lien investing golden lists, is to break it into tiny pieces and take it a step at a time. Understand that you do not even need to examine every single item on the list. You just need to locate the few properties needed to cover the funds you have for investing in tax liens. Honestly, this will most likely not even get you 10, then bidders would bid 9, 7. That is a pretty tiny ROI and smaller than desirable. Such a tiny ROI makes tax lien investing appear to be a terrible idea.

So then what happens is that when the redemption occurs, the debtor pays the full interest rate, but the certificate owner only earns the bid percentage while the state earns the rest. Still not a worthy investment in my mind.

Occasionally a state will auction off 'ownership' of a property that the tax lien is against. Assume that a tax lien certificate is worth $1000, then it can't be auctioned for more than that figure. Now, bidders bid on how much of the total property they will own if there is a foreclosure. The lowest bidder will become the tax lien certificate holder.

What this means is, someone has a winning bid of 1 of the auction value of the property. Let's say a property sells for $100k and you bought a $1000 certificate on the property that you bid 1 rate, then certificate will be worth 1150 once paid off. Yet, since you paid 1100, you only net $50. So your true ROI is 50/1100 = 4.5% I am sure you can see how this system can quickly bid you right out of your cash and quickly into a loss if you are not cautious with the numbers when tax lien investing using this bidding structure.

Knowing these bidding structures is VERY critical to making sure you are getting the return on your investment that you are trying to get. It is very probable that bidding and winning a tax lien certificate could net you much less than wanted if you partake in an auction you do not fully understand. This should be apparent from some of the above examples.

I suggest that you should attend a number of auctions before you actually take part in tax lien investing. You will obtainfamiliarity and confidence in the methods.

Lastly, if done correctly, you can invest in tax liens with a rather tiny amount. A tiny amount means a few hundred dollars. Tax lien investing does not take a significant amount of cash to begin investing. What is needed is a little education (these articles should be plenty) and a little experience. The experience is up to you.

Good luck in your future state tax lien investing endeavors!

Author is a writer for Beginner State Tax Lien Investing, passive income and Investing For Beginners, a joint blog about personal investing and development of passive income.

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