During the tax lien sale process a governmental agency administers a public auction when there are more than one prospective investors seeking out the lien.  When considering the tax lien auction process investors should be aware that the bidding systems for tax liens vary from state to state.  Depending on the state, some counties have a set system while others can adhere to any system they’d like.

Bid Down the Interest.  This method is used when the state establishes a maximum rate of return, or interest, and the bidders must actually bid towards lower rates.  This differs from other types of auctions because the lowest bidder will win the tax lien.  Investors tend to be more agreeable to bidding a lower rate when the lien seems more attractive in terms of the possibility of a quicker pay off.  As a strategy, a bidder might even bid as little as 1% knowing that the property owner will pay promptly and the state has a minimum rate established, such as 5% for Florida. 

Bid Down the Ownership.  This method is only used in Iowa and involves bidding lower percentages of the entire lien’s value.  For example an investor that bid 90% will only receive 90% of the lien when it is redeemed.  Otherwise, if the property goes into default, the investor would then only be entitled to 90% of the proceedings.  Because investors normally do not want to settle for anything less than 100%, the process then goes to the “random selection” method. 

Random Selection.  During random selection an official or a computer (depending on the sophistication of the county) selects a number that corresponds to an investor.  That investor then has the option to accept the lien or deny it, in which case it will be offered to the next randomly selected bidder.

Premium Bid.   In a premium bidding system the tax lien goes to the investor who bids the most “premium” above the amount of the lien.  Depending on the state, the investor may or may not accrue interest on the premium, only on the portion of the lien.  In Colorado, the premium does not gain interest and the investor must recoup the amount of the premium through the interest gained for the term of the lien. 

Rotational Selection.  In the rotational selection bidding process, investors have very little control over which tax lien they are offered.  Usually, the official conducting the auction will designate a number to every investor and then in numerical order offer a certain lien to each investor.  If investor number 1 declines, the offer passes to investor number 2 and so on.  This tends to be viewed as the fairest way to auction liens.

Over the Counter, or “off the shelf.”  In some states and counties, the tax liens that are not sold in an auction can be purchased directly from the county tax collector.  Because this bypasses the bidding process, investors are allowed the maximum state interest rate.