When most of us think of an auction, we think of a group of people either shouting out bids or holding up signs until one bidder outpaces the rest and wins the item in question for the highest sum of money offered for the item. We probably hear the common phrase “SOLD, to the bidder in the black in the corner of the room,” or some similar exclamation ringing in our ears when we think of the bidding process. Tax lien bidding is quite similar to this, although generally there will not be all that many people in attendance and frequently the bidding is quieter – either in advance or even online. However, the basic process is the same.

What is not the same, however, in some cases, is the way that you get your return on investment. In a regular auction for jewelry or art, for example, if you bid the highest on an item, that item is yours. Your return is ownership of that item. However, when you bid on a tax lien, you are bidding on the opportunity to make money. And not every opportunity that you bid on will be the same.

Some areas of the country have tax lien auctions that are handled via a “buyer’s bid” process. This means that when you bid, you are bidding against other buyers on a tax lien. However, should you bid more than the amount of the tax lien; you will not get that money back when the lien is redeemed. It is considered the cost of doing business, so you must factor that cost in when you bid over the cost of the lien.

For example, say that you are bidding on a tax lien that has a face amount of $2000. Your bid, at $2500, is the highest, and you win the lien. You now have the right to collect on that lien or, failing that, to foreclose on the property. However, the debtor will not be paying you fees and interest on $2500, but on $2000. That extra $500 you kicked in is not part of the collection equation. You can definitely still make money on this lien by collecting the fees and interest on the $2000 or by foreclosing on the property, should the opportunity arise. However, you must factor the buyer’s bid process into your evaluation of the lien and the property before you ever place a bid. Otherwise, you can end up seriously in the hole with a single ill-advised bid.

The buyer’s bid process is not used in all tax lien auctions. Do you avoid this protocol or have you found a way to make it work for you?

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Just as the rules governing how bidding is handled in tax lien auctions vary from area to area, the rules involving fairness in the bidding process also vary. It is very important that you understand and are aware of these rules, however, since a violation could result in your bid being unacceptable – even if it was the winning bid – or, more likely, in your being assessed a penalty for unfair bidding practice.

Generally, most penalties are assessed for late payment on a won tax lien. Some local governments may require you to make a deposit up front and then deliver the balance of your bid within a period of days, while others may allow you a period of up to a few weeks to make your payment. Miss the deadline, however, and you may not only owe the amount that you bid, but you also may owe up to 25 percent of your winning bid in fees and fines.

More problematic can be collusion rules. These are rules that prevent bidders from agreeing not to bid against each other on certain properties. These rules are particularly common in states in which the bidders and investors are bidding down on the interest rates on the liens, since an agreement not to bid against each other hurts the interest of the original property owner, who might end up paying less interest on the lien if there were competition for it. You need to make sure that you are aware of all rules that govern your behavior before, during and after the bidding process before you invest your time and money in a tax lien auction and the properties for sale.

What are your special tricks for avoiding trouble with bidder collusion rules and late payment penalties?

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According to a report released this week by the Treasury Inspector General for Tax Administration, the IRS is not doing a very good job of notifying taxpayers who owe delinquent taxes. Federal tax liens are created when a taxpayer receives a notice demanding payment and then neglects or refuses to pay. By law, taxpayers must be notified within 5 days of the filing of the lien.

However, the IRS, according to the Treasury Inspector General’s report, is not notifying taxpayers in a timely manner, estimating that in a sample period taken in 2009, 15,169 lien notices may have been mailed late. In fact, some lien notices were never mailed at all.

You may be wondering what this has to do with your property tax investing. After all, you can purchase property tax liens on properties that also have federal tax liens against them, although this can make the foreclosure process more complicated. However, if the homeowner has not been appropriately notified of the federal tax lien, then the entire property could be tied up in an appeals process on the tax lien itself or on the failure to notify for months or even years, preventing you from either collecting on your loan or from foreclosing on and taking control of the property.

Because working with and around IRS liens can be so complicated, many investors opt to avoid these types of properties completely. However, they fit the bill perfectly for other investors, particularly if they hope to foreclose on the property rather than have the lien redeemed. What types of tax liens and properties do you like best?

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When you are preparing for a tax lien or tax deed auction, you will have a lot of things to do. You will need to get registered, evaluate the properties and determine how much you are willing to spend on a property in order to obtain the deed or the lien against the deed, depending on the auction. You may also have to arrange to show proof of funds or even make a deposit to show that you are ready, willing and able to buy.

In the rush of all these preparations, however, be sure to check on one thing:

Do you have to be present at the auction in order to win?

I know this sounds like a church raffle rather than a high-tech, high-stakes bidding and auction process, but in some areas you cannot be the winning bidder if you are not physically present and prepared to hand over your payment. You will find information regarding the terms that you must meet in order to be the winner in your bidder information packet. Be sure to verify this vitally important piece of information and make sure that you can be there, if necessary, to win your tax liens before you spend too much time on getting all of the other necessary preparations in place.

Do you prefer to bid in person at tax lien auctions or from afar?

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As most tax lien investors know, every tax lien and tax deed auction is slightly different. Every county and city has a slightly different protocol for dealing with tax lien auctions, and there are some things that you will need to check out before you get involved in the bidding to make sure that you are setting up a situation for yourself that can lead to tax lien investing success.

For starters, you need to determine just how many tax liens you can buy. You would think that at an auction, they would let you buy as many as you could afford, right? After all, the city is trying to recoup their money on the debt. However, some tax authorities will limit the number of liens that a single investor or business entity can purchase. You need to know before you go whether these types of limits are in place so that you can focus on the best liens and properties for you rather than bidding on something that might not be quite as beneficial and knocking yourself out of the running for a real winner.

Once you know how much you can buy, you need to know how you should plan to pay. Some tax auctions require up-front deposits or cashier’s checks in the amount of a percentage of what you plan to bid. You will need to know how you need to pay and how quickly that payment will need to take place once you have won the lien.

Finally, you need to have established a plan for either collecting on your lien or taking over the property. Different states have different rules about how and when you can contact the homeowner. Some regions actually prefer to do this for you. You need to make sure that your collection and possible foreclosure efforts conform to all legal requirements so that your investing process is not derailed by legal minutia.

What is something that you always make sure to know about before you hit a tax lien auction?

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If you wish to bid at a tax lien or tax deed auction, then you must register for the process ahead of time. In most areas of the country, you cannot simply show up at the auction and start bidding. Instead, you must register and often provide proof of funds to purchase properties or post a deposit to show that you not only intend to bid, but are able to follow through should you successfully purchase a tax lien or tax deed.

Once you know where you want to participate in an auction and the date of the auction, call ahead to find out what is involved in that area’s tax auction registration. If possible, review the properties ahead of time and have an idea of what you plan to bid on and how high you plan to bid, since many areas ask for cashier’s checks for some percentage of the value of your proposed bid. Of course, if you do not win, you get your check back. This is to keep the auction restricted to serious bidders with the funds to back up their bidding.

Once you are registered as a bidder, you will receive a bidder information packet that should inform you of the specific rules and regulations enforced at the auction you plan to attend. Read this carefully, since violating these procedures can result in your inability to participate in the auction. Always make sure to request this packet when you register, and always review it ahead of time to make sure that you are up to date on any new requirements for placing bids on properties.

What was the most complicated auction you ever attended?

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Like residential properties, commercial properties are assessed for property taxes by the local government. Should the owner of that commercial property fail to pay their property taxes, then the commercial property may go to tax auction just like any other property and the lien can be purchased on that property. As a result, it is possible – albeit not particularly likely since there are a lot of parties with interest in any given commercial property that will likely pay off the lien – that you could encounter an opportunity to get involved in commercial real estate investing via a tax auction.

Should you encounter a commercial property at a tax lien auction, then you may be tempted to bid on the property. However, you will need a commercial real estate expert to work with you to determine what type of bid will be appropriate. There are a lot of factors in play when it comes to commercial real estate, including the fact that there will be certain things that you can and cannot do with the property once it is under your control, and a potentially more complicated foreclosure process should the owners fail to pay off the lien.

Often, large investment groups seek out commercial real estate at tax auctions. These groups frequently have very large pools of funds at their disposal and will bid very high on a viable commercial property. You might want to consider working with such a group or finding a commercial investor who already has some experience in this arena to work with you if you want to give commercial property tax lien investing a try. Otherwise, you may end up with a tax lien in your possession with which you can do very little.

Have you ever purchased commercial or retail property via tax lien auction?

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The other day, we talked about characteristics to look for if you wanted a high likelihood for your tax liens to be redeemed rather than having to foreclose on the property. In the article, we touched on how younger neighborhoods tended to be more likely to have liens that would be redeemed. This is because young families tend to be emotionally invested in their home ownership and be planning to remain in the home. They also tend to have a variety of resources that they can plumb if necessary in order to pay the lien.

The converse holds true as well. Neighborhoods that are “aging” often are also declining. This is simply because older homeowners may already be considering leaving their home. They often live on a fixed income, meaning that if they cannot afford to pay the taxes on time, they may not be able to afford them at all. If you want a tax lien that has better odds of requiring foreclosure, then an aging population may be indicative that you could purchase such a lien in that area.

Of course there are exceptions to each of these rules. What do you look for in your tax liens?

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Some tax lien investors buy liens just so that they can eventually get control of the property in question via foreclosure. Others actually prefer to have the liens redeemed and collect the fees, penalties and interest associated with lien ownership for a great return on investment. If you are in the latter category, then here are 3 things to look for that will indicate that your lien is fairly likely – though never guaranteed – to be redeemed.

1.    Younger population in the neighborhood. This often indicates that the area is on an “upswing” and people will want to keep their homes and remain in them.

2.    Owner living in the property. If the property is inhabited by the person who owes the money, they have a serious personal stake in the lien’s redemption and will likely to everything possible to avoid losing the home.

3.    The property is mortgaged. A mortgage company will pay the lien before losing their collateral. Usually, this means that mortgaged properties never make it to auction. If you spot one, though, it’s fairly likely that the lender will ultimately pay to avoid losing collateral.

What do you look for in your tax lien properties?

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In Delaware, one county is providing all tax lien investors with a special “preview” of opportunities to come. Sussex County is posting a “top 100” delinquent property tax list online to attempt to place some public pressure on the individuals who have failed to pay in a timely manner . Collectively, the group owes about 12 million dollars. The county reports that more than a quarter of the list is made up of corporations and land developers. The county hopes that publishing the names of the highest-debt offenders will embarrass them into paying their taxes, and will refresh the list as owners pay up.

Interestingly the largest subcategory of properties is manufactured and mobile homes. This subcategory owes about 7 million dollars total. The owners of the properties have already been warned that the list is going public, so they should not be surprised to be contacted by potential investors looking to help them deal with their problems. If you are the type of tax lien investor who likes to avoid the auction scene, then this new trend of publication and pressure could be a new avenue for you to locate promising properties in tax lien trouble.

Do you think publishing a “top 100” list is a reasonable act on the part of Sussex County?

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