Lender · Los Angeles · Member since 2013 · 63 posts · 33 votes
Can someone comment on why municipalities charge a high bid premium on winning tax lien bids, and what happens to these funds since they don't incur interest. For example, I see a MD county charging a 20% premium on any bids that are higher than 40% of the cash or assessed value of a property. So am I correct in assuming a $42k winning bid on a property worth $100k would incur a $400 high bid premium.
$100k x .40= $40k, thus $2k x .20= $400 for a total purchase of $42,400 , of which the $400 is not interest bearing.
Is this a financial incentive for mortgage holders on a property to take FC action quickly?
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
12y
The purpose is to limit how high the bids are.
A little history, it used to be any nice property in MD would get a $1,000,000 bid. (NOTE: In MD the bid amount is what you will pay for the property in the event you foreclose.) Investors bid this much because they wanted the 18%interest on the lien. They were wiling to walk away on the occasional lien that did not redeem.
Obviously no one would foreclose on a property that was only worth $150K if they bid $1,000,000. So the tax sale bidders would drag out their foreclosure cases for years hoping that eventually the owner would pay or the property would be sold and the taxes paid at settlement. This left many properties in limbo where the taxes were not bring paid.
To correct this situation the legislature came up with the high bid premium. Once you reach the 40% of assessment level, bidding any higher reduces your effective interest rate. This serves to limit the bids to a reasonable level.
When the owner redeems you get your lien, interest on the lien, and the high bid premium back (with no interest on the high bid premium.) If the owner does not redeem and you foreclose on the property then the high bid premium gets applied to your purchase price (bid amount)
This is the process for MD. This will vary greatly by state.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
12y
The purpose is to limit how high the bids are.
A little history, it used to be any nice property in MD would get a $1,000,000 bid. (NOTE: In MD the bid amount is what you will pay for the property in the event you foreclose.) Investors bid this much because they wanted the 18%interest on the lien. They were wiling to walk away on the occasional lien that did not redeem.
Obviously no one would foreclose on a property that was only worth $150K if they bid $1,000,000. So the tax sale bidders would drag out their foreclosure cases for years hoping that eventually the owner would pay or the property would be sold and the taxes paid at settlement. This left many properties in limbo where the taxes were not bring paid.
To correct this situation the legislature came up with the high bid premium. Once you reach the 40% of assessment level, bidding any higher reduces your effective interest rate. This serves to limit the bids to a reasonable level.
When the owner redeems you get your lien, interest on the lien, and the high bid premium back (with no interest on the high bid premium.) If the owner does not redeem and you foreclose on the property then the high bid premium gets applied to your purchase price (bid amount)
This is the process for MD. This will vary greatly by state.
Toms River, NJ · Member since 2016 · 11 posts · 4 votes
4y
I invested in Tax liens 20 years ago and was looking to do so again, I see now it all online (are they also live?) I'm in NJ. I'm looking to get current on the process. What would be a good quick learn ?? Thanks
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
4y
@Kurt Kopf Often the auction site or the county website has pretty good information on the process. Sometimes a call to the tax sale office of the county can help. I have seen some counties have a meeting about the sale to explain it. This is sometime virtual for online auctions.
Right here on BP is one place to learn. There have been some pretty state specific threads about tax sales here. I actually read the state statutes. This has helped me learn some details that have helped me over the years. But reading statutes is not much fun. early on I took a tax sale foreclosure attorney to breakfast and picked his brain. He was happy to help because he wanted, and got, my business.
One way is simply to try it out at a small level. I learn something new every year.