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What is a Tax Sale?

May 22nd, 2008 · 25 Comments

What is a Tax Sale?

After writing the previous post, Tax Sale Results part 1 I realized that some readers may not know what a tax sale is, so I will give a brief description and then the results.

The bulk of the income for most municipalities is property taxes. To encourage people to pay their taxes on time cities and counties generally charge high interest and penalties. They will also put a lien against the property so that it cannot sell without the taxes being paid off.  Ultimately if the taxes are not paid then the county can take the property for non payment of the taxes.

But counties need money to pay the teachers, policemen, and garbage collectors etc. Payroll comes every two weeks. They can’t wait for someone to take their good ol’ time to pay their taxes, they need the money now. So the tax sale was developed.

Municipalities auction off tax lien certificates to investors, or intax certificate some cases tax deeds. The holder of these certificates has a lien against the property and essentially takes the place of the government tax collector. They get to collect interest on the amount due and have the right to foreclose on the property if the lien is not paid off. In the case of tax deeds, the investor gets a deed to the property and no foreclosure is needed, but usually the previous property owner has a redemption period.

Investors generally buy tax certificates for two reasons; to collect interest, or to get discounted properties by foreclosing on the lien. Yes you can make good money in tax sale but it is not as easy as “Pennies on the Dollar” that the infomercial guys would have you believe. It is an auction after all and it can be quite competitive as you will see below.

How Does it Work?

The specific regulations and interest rates will vary by state and sometimes jurisdiction. Here in Maryland we are a tax lien state and the nominal interest is 6-18% depending on the county. I say nominal interest rate because it is an auction and the effective rate depends on the bid and a complex formula called the “High Bid Premium”. This premium must be deposited with the county and does not earn interest.

The bidding determines three things:

1) The price you will pay if you foreclose on the property, this is your bid amount.

2) How much you have to pay the day of the auction, you must pay both the lien amount and the high bid premium.

3) Your effective interest rate. Because the high bid premium does not earn interest the more you pay the lower your effective interest rate.

Baltimore City 2008 Tax Sale Results, part 2

Well the City did pretty well last Monday, 9026 liens were sold at the Auction May 12th. The total lien value was $23 million and the high bid premium was $42 million for a total to the city of $65 million.

Almost 1200 properties received no bids and the liens revert to the City of Baltimore. You can go down to the city now and get one of these liens for face value. Most of these leftovers are junk liens. One of the worst case examples is 2620 Frederick Ave. with an assessed value of $11,600 with a lien of $606,616.

Yes you read that right – one half million dollars in taxes owed on a property worth $11,000! On average the liens on these leftover properties are 96% of the assessed value!

The top bidder in dollars was #189 ETS Maryland. They spent $17 million to win  2111 liens.  Based on their bids, they will earn an effective interest rate of 6.91%

The next highest bidder was #30, 2008 City Holdings LLC, represented by Heidi Kenny an attorney who does tax foreclosure work. She spent $16 million last Monday. Her effective interest rate was 4.65%.

One bidder bid their interest rate down to .48% although that was an extreme 18 bidders did down to less than 5%. However 15 bidders bids will allow for the full 18% interest. The average interest rate received is 6.26%

You’ve heard of the 80/20 rule right? Well the bidding was even more lopsided than that. The top 10% won 95% of the liens. There was a total of 177 bidders. Ninety Nine bidders won at least one lien.

So How Did Ned Do?

I was in the top 20 bidders. I am certainly not one of the big guys but I have grown out of the one-sie, two-sie stage. My goal is to acquire properties. So I won’t really know for another year or two how I really did.  However I got the most liens ever and I paid much less in high bid premiums than last year. My effective interest rate is about 13%, so that’s pretty good.

How About Some Good News for the Small Guys.

Well 9 bidders were able to win 1 lien for a total cost of under $1000. They all will earn the full 18% if the lien redeems. Thirty eight bidders were able to bid low enough to get a 15% effective rate or higher. Many bidders bid on 5 or fewer liens and still won at least on lien. Over 1/2 of the bidders bid on less that 12 liens and many won something. So you can play at this game on a small scale with a modest amount of money.  But you better learn the rules and know how to play the game. You are playing against the big boys.

Happy investing,

Ned

PS: if you like my posts leave a comment below or click share this. Thanks.

More articles on tax liens here

Tags: Advanced tips · real estate · Tax Liens

25 responses so far ↓

  • 1 Mark McGlothlin (1 comments.) // May 27, 2008 at 12:44 pm

    Ned, well written and great angle to show that the little guy has a chance in this game.

  • 2 Price Fixing at Maryland Tax Sales! // Jun 4, 2008 at 1:27 am

    […] attorney that I had reported won so many bids at the recent Baltimore City tax lien auction. See What is a Tax Sale? He will pay a $750,000 fine as well as face prison time. Given that his wife spent $16 million […]

  • 3 Jonathan Benya (10 comments.) // Jun 11, 2008 at 3:51 pm

    Ned,

    I was wondering if you had ever looked at wholesale bank foreclosure sales as a method of investing. Have you tried it? What do you think of it?

  • 4 CGP // Nov 4, 2008 at 5:42 pm

    How do I learn how to play the game. I have a little investment money and would love to potentially score a property. Where can I get more information on how to do this well?

  • 5 Ned // Nov 5, 2008 at 3:29 pm

    CGP,

    Keep reading, I will continue to write about tax sales. Coming posts will be about some case studies of properties I have acquired. I am also thinking about an E-book on tax sales.

    There are certainly a lot of courses and e-books about tax sales on the web. There are usually Google ads on the side for some of these. I cannot comment on the quality of them however.

    Johnathan,

    I missed our comment earlier. I guess because you are automatically approved now.

    I have bought pre foreclosure, at the foreclosure auctiona and I an getting ready to put in an offer for a bank owner property now. I haven’t done a lot of that but the deals are out there. Just remember just because it is a foreclosure doesn’t mean it is a good deal.

    Also it is important to be aware of the Homeowners in Forclosure Protection act. You must follow strickt guidelines if you are buying from someone who is behind on their mortgage.

    Ned

  • 6 Dave // Mar 2, 2009 at 8:27 pm

    Ned, good info above- however, I am a little confused about the bid amount for the Baltimore City tax sale. I read your post above and been through the bidbaltimore.com tutorial, but unclear on how to determine the amount for the bidbaltimore.com web site. Unfortunately, I still don’t quite get how determine the actual amount to bid. Can you explain further?

  • 7 Dave // Mar 2, 2009 at 8:32 pm

    actually to be clearer with the last comment – is: -How do I determine the amount that is actually due from the bidder immediately to obtain the tax certificate?

    Thanks – any help is appreciated

  • 8 Ned // Mar 3, 2009 at 12:48 am

    Dave,

    The day of the tax sale you pay the lien amount plus the high bid premium.

    The high bid premium is 40% of the amount of your bid that is over 40% of the assessed value.
    Let’s say you bid $50,000 on a property assessed at $100,000. Forty% of the assessed value is $40,000. Your bid is $10,000 more than that. So you pay 40% of the $10,000 as a high bid premium.

    That’s about as clear as mud right? Hey I didn’t design the system. I will try to write a post about it and maybe I can make it more clear.

    Of course a simpler way to figure how much is due is enter your bid and the website will calculate it for you. You certainly don’t want to do this the day of the sale so enter your bids ahead of time and you can see how it all adds up.

  • 9 Dave // Mar 3, 2009 at 10:39 pm

    Thanks Ned. You’re clear about one thing – “its as clear as mud”.

    So one is bidding on the amount they would pay for the property in the end if they were to foreclose? Although you would only actually pay that as the balance due should it come to taking the property over from foreclosure?
    Suppose I have 25,000 to buy a few liens… On your example above I would bid 50,000 as a total bid that I would pay for the house. Let’s say the delinquent tax on your example is $1500. How much would the system debit my account once awarded to me? And what are the ramifications if one decided not to foreclose and let the lien expire? Just lose the tax payment that was made toward property?

    I will look into the city web site more, but would love to see someone other than the treasurer’s office explain it. I also wonder why more counties have not made a similar web based bid system.

    Thanks, I look forward to your post.

  • 10 Ned // Mar 3, 2009 at 11:06 pm

    Dave,

    In the example above the high bid premium would be $4000. (40% of $10,000). So the day of the tax sale you would pay a total of $5500. But you would only earn interest on the $1500.

    If it is redeemed you would get interest on the $1500 and the original $5500 back. If you foreclose you would have to pay $50,000 plus legal expenses and any subsequent taxes that are due. However the $5500 would be applied to what you owe.

    If you decide not to foreclose, you simply loose your $5500.

  • 11 Dave // Mar 3, 2009 at 11:17 pm

    Thanks Ned. That is perfectly clear. I assume that in any county or state where there are tax lien crt’s using the “high bid premium method” this is the process?

  • 12 Ned // Mar 4, 2009 at 3:47 am

    Dave,

    This is the process in Maryland. Each state is different. I believe the high bid premium method is optional so some counties may not use it.

  • 13 Joy // May 6, 2009 at 2:15 pm

    I have a question about a high-bid premium in a Baltimore City Tax Sale. If the lien value is $4,000 and the property is assessed at $120,000 what would I have to pay at the sale. Could I bid $10,000 or would I be required to pay the 40% of the assessed value of the house? Thanks so much!

  • 14 Ned // May 6, 2009 at 11:25 pm

    Joy,

    Thanks for stopping by and taking the time to comment.

    The high bid premium is confusing and I need to write a post about it. To answer your question. . . No. You would not pay any high bid premium. You only pay a high bid premium IF you bid more than 40% of the assessed value of the property.

    So in your example if you bid more than $48,000 for the property you would pay 20% of the amount OVER $48,000 as a high bid premium.

  • 15 Ethan // May 12, 2009 at 10:57 pm

    Ned,

    Thanks for all the information regarding the tax sale process. Like the other people who commented, I’ve been looking at the bidding process and am confused. I understand how to calculate the high bid premium, but want clarification on the bid amount. I am correct in saying that the bid only relates to the amount you must pay should you (the buyer) exercise the foreclosure option? If so, are the only amounts you pay at the time of sale the amount of the tax lien plus the high bid premium (as calculated per each county’s guidelines)? Thanks!

  • 16 Ned // May 14, 2009 at 9:59 pm

    Ethan,

    Thanks for reading. Yes, your bid amount is the amount you pay IF you foreclose and take over the property. That is only paid if and when the foreclosure is final. You are also correct that the amount due at the time of the sale is the lien amount and any high bid premium.

    Ned

  • 17 Armand // May 20, 2009 at 8:12 pm

    hey Ned, i would like to thank you for still taking your time to reply to all the posts and confused people we are about tax sale bid and premium but it’s coming very hady to me..i’m looking forward to attend our next tax sale in montgomery county on june 8 and i really need to come brace to know what i’ll be doing there..so bottom line, you don’t pay a high bid premium if your bid don’t exceed 40% of the propertie assessed value?so then do you decide how much to bid on the properties assessed value? so here an example: these are from a real tax sale list. please tell me what should i bid for not paying any premium :
    Assessed value:$58550
    Amount due:$716.51
    what will my high bid premium be if so.
    what what can i bid not to pay the premium.
    Thanks a lot..

  • 18 Ned // May 20, 2009 at 9:40 pm

    Armand,

    Thanks for reading and your nice comment.

    I don’t understand your question exactly. I can’t tell you how much to bid because there are more factors than just the high bid premium. What I can tell you, based on your example is that if you bid more than $23,420 you will have to pay a premium. If you bid over that by $5,000 you would have to pay $1,000 in high bid premium. If you bid $10,000 more than that you would have to pay $2,000 in high bid premium. I hope this helps.

    Ned

  • 19 todd // Jun 7, 2009 at 11:41 am

    hello Ned, awesome site for new investors, I own one property in Baltimore city, was wondering if I can contact ETS Maryland to see if they would sell the tax cert. note to me if I had an eye on one specific property that they won at the tax sale? Is this common or unusual?
    Thanks for any feedback, Todd

  • 20 Ned // Jun 9, 2009 at 6:18 pm

    Todd,

    Thanks for reading and the nice compliment. If ETS is owned by who I think they are I doubt they would sell you a lien. They may sell you an older lien that they overbid on : – ) I don’t believe it is very common for people to sell liens but it is done. They are freely transferable.

  • 21 Andrew // Jul 16, 2010 at 8:13 pm

    Hey Ned,

    I’ve been reading up on your blog, along with the bidbaltimore.com FAQ, and I have a question about the amount that the redeemer of a property sold at tax sale is required to pay. Are they required to pay the total amount bid + attorneys fees, high bid premium etc. OR are they required to pay the lien amount + the attorneys fees, high bid premium etc.?

    For example:
    Assessed value: $100,000.00
    Liens: $5,000.00
    Bid: $65,000.00
    Attorneys fees: $3,000.00

    Does the redeemer have to pay the entire bid amount of $65,000.00 + fees or is it the $5,000.00 + associated fees?

    Thanks for your insight on this. As you’ve probably already guessed, I’m trying to figure out what the possibilities are with purchasing a property that has been bid and won at the last tax sale.

  • 22 Ned // Jul 17, 2010 at 2:04 pm

    Andrew,

    Firstly thanks for reading!

    A person redeeming a property in tax sale must pay:
    1) The lien amount
    2) Interest which is 18% in Baltimore City from the day of the auction
    3) Any actual legal expenses that the lien holder has had
    4) Any additional taxes which have come due since the lien was sold. In other words they must catch up ALL the back taxes not just what is due the lien holder.

    The City is holding the high bid premium and will refund that to the tax lien holder. The bid amount is not a factor in this case. It was never paid so it doesn’t need to be paid back.

    This post to help homeowners in tax sale Help My Home is Going to Tax Sale might be useful to you.

  • 23 Andrew // Jul 18, 2010 at 10:22 am

    Thanks much Ned, this is extremely helpful in bringing us newcomers out of the dark!

    I’m looking at the ‘Remarks’ in the Tax Sale Work Record and it says there’s a $160.00 fee for advertising, an auction fee of $1,000.00, atty fee $3,000.00. Are these legitimate fees that the redeemer is obligated to pay?

    Also, are my calculations correct that the interest on a $5,000.00 lien is $900.00 within the first year?

    Thanks again!

  • 24 Andrew // Jul 19, 2010 at 5:53 pm

    Please disregard the most recent thread.. doh! Sorry, I misread the numbers and realized soon after that these were only small fees of 10.00, 16.00 and 30.00.

  • 25 Ned // Aug 1, 2010 at 1:16 pm

    Andrew, Opps, I missed replying to this one.
    Yes $900 interest per year, and if you don’t pay for a year there is a good chance that foreclosure will have started and you could be liable for up to another $3000 in legal expenses.

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