Maryland’s High Bid Premium
Maryland uses a complicated system for their tax sale bidding called the “High Bid Premium” method. This formula determines how much you pay the day of the auction as well as what your effective interest rate is.
High Bid Premium Determines Three key Amounts
Your bid at the Baltimore City Tax sale or most other Maryland tax auctions determines three key things.
- How much you will pay for the property if you foreclose and get the property. This amount is only due, if and when a foreclosure is complete.
- The high bid premium, this premium is added to the lien amount and due the day of the sale
- Your effective interest. You only earn interest on the lien amount NOT the high bid premium.
The High Bid Premium Formula
The formula is, 20% of the amount of your bid, over 40% of the assessed value of the property equals the High bid premium. If the bid is below 40% of the assessed value there is no high bid premium. Presuming the bid is above 40% the formula can be expressed as shown here.
Bid amount – (Assessed Value X 40%) X 20% = High Bid Premium
That’s about as clear as mud, eh?
High Bid Premium Examples
Assessment $100,000
Bid amount $50,000
40% of assessment = $40,000
$50,000 – $40,000 = $10,000
$10,000 X 20% = $2,000 High Bid Premium
Assessment $155,000
Bid amount $70,000
40% of assessment = $62,000
$69,000 – $62,000 = $7,000
$7,000 X 20% = $1,400 High Bid Premium
Assessment $60,000
Bid amount $6,500
40% of assessment = $24,000
No High Bid Premium Due
High Bid Premium Graph
How the high bid premium affects your Rate of Return
The high bid premium is added to the lien amount to get the amount that is due the day of the sale. You earn interest only on the lien amount, NOT on the high bid premium. So a $500 lien with a $1,000 high bid premium reduces your effective return to 6%. On a $5,000 lien, that same $1,000 high bid premium would make your effective interest rate approximately 16.4%. That is a big difference. You need to understand the rules and how they affect you when bidding at tax sale.
You Get the High Bid Premium Back
When the lien is paid off (redeemed) you will get your lien amount, interest on the lien, and the high bid premium will be returned. If you have a successful foreclosure the high bid premium goes toward the price you bid for the property. However if the lien does not redeem and you choose not to foreclose the high bid premium is lost.
Good luck and don’t bid too high.
Ned
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10 responses so far ↓
1 Joe // May 11, 2011 at 10:44 pm
Hey Ned,
Great article & easy-to-follow illustration! It’s a welcome relief from all the infomercials out there plugging the “exceptions”.
Very excited to see what happens at this year’s Baltimore City sale, but I noticed several homes listed have already been foreclosed on. Does that mean an investor could potentially buy a void certificate or – now knowing how much the outstanding mortgage was – the winning bid had better be at least the court-listed amount to have any real hope of foreclosing on the property from the bank?
2 Ned // May 13, 2011 at 1:53 pm
Hey Joe, Thanks for the compliment. I wanted something to make the high bid premium easy to understand.
If a property foreclosure has been completed then whoever did the foreclosure is now the owner. You could buy a new tax lien and foreclose on them. If the a tax foreclosure is still in process then the city should withdraw the lien from the sale on the last update. Sometimes a lien will slip though and it will be voided and you get our money back.
If there is a mortgage foreclosure in process usually the bank will pay off the taxes. Sometimes they will wait until the foreclosure, auction, and court ratification to be complete before paying the taxes. If that is the case the tax sale foreclosure may beat their mortgage foreclosure and the tax lien holder will get the property.
Good luck,
Ned
3 Sire (53 comments.) // May 14, 2011 at 12:15 am
Hey Ned, man, you guys must go through a lot of training to gain the necessary knowledge needed for the selling of homes etc. Necessary because I’m assuming if you don’t dot all the i’s and cross all the t’s you could find yourself in some strife.
If nothing else at least I now know how to work out the high bid premium, that is if I ever move to Maryland.
4 Steve // May 16, 2011 at 9:42 pm
I think your simple explanation confused me, which is quite easy. If I buy a lien for $2,000 with a premium of $1,000, I am paying a total of $3,000 and getting an effective return of 12%. I get that. But what if the lien is payed off in two months? Wouldn’t I just make $60 for the two months, and have a net loss of $940 ($1,000 bid premium paid, less the $60 interest earned)? I am sure I am missing something…. Thanks!
5 Ned // May 17, 2011 at 12:15 am
Steve, Thanks for reading and commenting.
You get the high bid premium back when the lien is paid off. If it is not paid off the high bid premium goes toward your bid price to pay for the house if you foreclose. Thanks for pointing it out – I have updated the post to make that more clear.
6 Kenny // May 18, 2011 at 7:36 pm
Hi Ned. This is my first time bidding on tax lien certificates and I’m a little confused about how the bidding process works. If there’s a tax lien for $1,000 and I bid $15,000 and no one else ends up bidding on the property am I going to have a high bid of $15,000 or will be end bid just be $1,000 since no one else bid on it? Thanks!
7 Ned // May 18, 2011 at 10:35 pm
Kenny,
Your bid is the amount you pay if you have a successful foreclosure. Your bid is NOT reduced. Some auctions reduce your bid to a minimum incremental increase over the next higher bidder. In Baltimore your bid is our bid even if you bid way higher than the next bidder.
However the amount you pay the day of the sale is the lien amount plus any high bid premium – not your full bid amount.
If you are bidding for the Baltimore City auction tomorrow the website will calculate your high bid premium and the amount due if you win when you enter the bid.
Good luck and I hope this gets to you in time. – Ned
8 Phil // May 14, 2014 at 3:26 pm
Hi Ned, thanks for the great explanation. One thing is still unclear though:
If the assessed value is $100,000 and I bid $30,000, then I only pay the lien value at the auction. But if the property is foreclosed, I have to pay the rest of the $30,000?
cheers, Phil
9 Ned // Jun 6, 2014 at 5:34 pm
Phil,
Yes The $30,000 bid (minus the lien amount) is paid when you record your deed after foreclosure.
Ned
10 Ron // Mar 3, 2017 at 4:40 pm
Thanks for the explanation. It was simple and easier to understand. Do you have any advice on how to arrive at the right bid price, as a percentage of assessed value.