Posted about 5 years ago

Basics for Online Tax Lien Auction process

Real Estate Tax Lien investing has been around for decades. The basic premise is that you, the investor, purchase a tax lien or tax certificate on a property. In effect, paying the overdue taxes of the property owner.

In return, you will receive interest on your lien investment at the time the property owner pays back the taxes. The rates are usually well above typical savings, accounts, Certificates of deposit or treasury bills.

For counties, unpaid tax bills lead to budget funding shortfalls. The counties create the liens and sell them off to gather the funds they need to meet their budget obligations.

Tax liens are not without risk. You can read some of the risks on other articles right here on Biggerpockets. In general, if you do your research, you can avoid bad property situations and earn a better than average rate of return on a passive investment.

This article is going to focus on the basics of “online” tax lien auctions. Not the strategies of investing, but instead, the basic nuts and bolts of how an online auction is run and what you, as an investor, have to do to participate.

In the past several years, counties have been making the jump from in-person tax lien auctions to having online auctions. The majority of tax lien sales take place at the county (sometimes city) level. In the past, you had to attend the auctions in person, or have a delegate attend, and then bid in an open outcry auction to win individual certificates.

Arizona and Florida lead most states in the number of counties that have taken their auctions online. This benefits the counties in many ways. In-person auctions require the county to sell each lien separately and some counties had 20,000 liens or more to try and sell in one week period. Many liens would never even make it to the auction before the end date, and the county was left with thousands of liens and no revenue source.

Those same counties are now able to conduct online sales that allow ALL the liens to be sold in a day or two. There are now many more investors who will bid because they do not have to be present. The auction systems also allow for the county to keep track of bidders, liens, payments, unsold lien inventory and other recordkeeping functions.

As an investor, you can bid and invest in tax liens from your home or office. It helps to be familiar with the area you're investing in, but you can buy liens across the country if you choose.

Here are the basics for what you need to know as a first time online tax lien investor:

    ·You have to be comfortable giving your Social Security number or Employee Identification number and banking account information over the internet. The counties need this for your bidder account and W-9 information.

    ·In some counties you can have several bidder accounts if you have separate Tax ID numbers. Some counties in Florida in 2013, decided to limit a person to only one account to cut down on big institutional investors opening thousands of accounts.

    ·Most counties will require a deposit of some sort before you can bid on liens. The deposit is usually handled through the auction website via an ACH transaction. You want to send that deposit in a few days before the auction starts. Wires and checks can also be used.

    ·Make sure you check with the county auction website on any cutoff dates. Some want all accounts opened and deposits made anywhere from one week to a couple of days prior to the auction beginning.

    ·Deposits generally are 10% of the total amount you will be investing. If you have $5,000 to invest, then usually a $500 deposit will need to be placed before the auction starts.

    ·Payment of the balance of what you owe after the auction is ended usually must be made within 24 hours – and sometimes 12 hours. Again, this is accomplished via the online website using an ACH transaction.

    ·Tip – use a checking account if you can for your deposit and payments. Banking regulations have limits on how many times you can wire out money from a savings account in a month. If you are participating in several county auctions in a month, you may have issues with your bank. You can wire out (also ACH) of checking accounts without a limit on the number of transactions.

    ·Most counties that offer online auctions will also offer an online list of liens available in the auction several weeks before the auction opens. Download that list and expect many liens to be paid off before the auction opens. Once the auction opens, the software usually greys out and does not allow bidding on liens that have been paid off by the owner before the end of the auction.

    ·Many auction websites allow several methods of placing your bids in the auction software. You can enter each bid individually, some have spreadsheet templates you can use for uploading bids on multiple liens, and some offer a simple way to bid on all liens in a group.

    ·You usually can change your bids before the auction ends. When there are several thousand liens to auction, the website will usually batch together several hundred liens in a batch. This way the county will end each batch every 30 minutes or hour. You can adjust your bids in later batches after you see how the first batches of liens end.

    ·You can bid on an amount of liens much greater than what you plan on investing. Because you will not win every lien on which you bid, you are encouraged to place bids on an aggregate lien amount much greater than you plan to invest. The software will cancel all your remaining open bids once you have reached your maximum amount you indicated you would invest in the auction. If you paid a $500 deposit on a maximum $5,000 investment, once you hit $5,000 (or just below that amount) the software will not allow you be the winner of any liens that would take you above that $5,000 limit. Rule of thumb is to place bids on 2-3 times the amount you have as a maximum. You can bid on more or less if you choose, but you will be cutoff once the $5,000 limit is reached.

    ·You will know within 2-3 minutes of a batch ending if you won any liens in that batch. You can monitor your online account with the county auction website for liens you have purchased.

    ·Make sure you know the rules on paying your balance once the auction is closed. The counties are very rigid in their rules for payment and if you miss the deadline, you will not receive the liens and you will be banned from participating in future tax lien auctions. The county sends an email right after the auction with your balance details and the deadline for payment.

    ·Tip – Within a few days, after the county has received all payments, the final lien results are available on the website. Copy those files down and you can use them in spreadsheets to see how others bid and the rates received on all the liens. It helps you analyze the results so you can make better bids next year.

    ·Some counties will send you a receipt or other document that lists the liens you purchased. Almost all counties keep the liens/certificate in electronic format and you don’t have a paper certificate. Some have no paper documentation at all and you can monitor your purchases with your online account.

    ·Payments when a property owner pays off the lien are usually made once a month by the county, and usually you receive a check in the mail that splits out the principal and interest amounts.

    ·You get a 1099-INT form from the county at the end of the year for any interest you have been paid on liens that have redeemed (paid off).

These are just a few of the basics for learning how online tax lien auctions are run. Knowing these basics should free you to concentrate on your strategies and ease your mind on the nuts and bolts of how online auctions are set up and run. Read through the rules on each website and take advantage of any free mock auctions they offer.

Two online auction software providers and links to their county auction websites:

RealAuction.com - http://www.realauction.com/county-tax-lien/

Grant Street Group Auctions - http://www.grantstreet.com/auctions/tax-lien-auctions/


Comments (6)

  1. Thanks for the write up Jerry!


  2. You get a 1099-INT form from the county at the end of the year for any interest you have been paid on liens that have redeemed (paid off).

    In NJ you may not get a 1099-INT.  The municipalities treat you like a contractor so any interest < $600 not reported.


    1. Mike thank you for that 1099-INT nuance for New Jersey. Another example of needing to know the local rules in tax lien investing.


  3. Shaun, Good old MA allows for tax lien AND tax deed sales. However most are tax deed sales and I have yet to see a tax lien sale. Also, MA is one of the states that has the deed sales at the city or municipality level and not the county level. So it takes some work to find the sales. Then the rules can be different per municipality. Also they are in-person, open outcry types of auctions. Now while that makes it hard to research, it makes for lower number of competitors but the competition is usually well versed in the process.


    1. From my far from exhaustive research it seems like not many municipalities actually do auctions. The city of Worcester seems to be pretty active in selling both tax deeds and tax foreclosures but that is the only place I have seen that seems to do anything regularly. Almost every other place I have seen that has any readily available information talks about in town debates over maybe doing something like that. I actually went to one here about 1.5 years ago. The auction house that was doing it was talking at some of the local REIAs about it. They were really marketing the option to a lot of towns. Best I can tell they have done 2 of these in the past 2+ years, but had a lot of towns talking with them about it. Unless places are actively trying to hide the information it seems like what the law allows and what the municipalities actually do don't jib in the vast majority of places here.


  4. Very nice intro to this technique. I will defiantly check out some of those sites and bone up a little on these processes. This is a strategy I have been interested in for a while but they don't really do it locally so dealing with some of those hassles you mentioned was a big deterrent.