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• Tax Liens Sales Procedures
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• Risk Analysis - Tax Liens
• Tax Liens and Competing Claims
• Tax Liens and Statute of Limitations
• Discharging a Tax Lien
• Tax Liens - From the Tax Lien Purchaser's Perspective
• Tax Liens - From the Government's Perspective
• Tax Liens - From the Tax Payer's Perspective
• Negative Effect of Tax Liens on 3rd Parties
• Pitfalls of Investing in Tax Liens
• Pitfalls of Tax Lien Sales for Taxation Authorities and Local Government

Procedures for Tax Liens Sales - The Auction Process

Throughout the United States, various procedures govern the sale of tax liens, but predominantly the auction process represents the fairest and most utilitarian. Bidders ought to have the requisite knowledge and means to satisfy the lien purchase prior to attending a tax lien sale.

Government authorities tend to use a public auction to offer tax liens to investors. Unfortunately, the auction process in such an instance can vary from State to State and also amongst the numerous municipalities thereof.

Accordingly, conversance with the various bidding systems is advisable before embarking on the decision to purchase a tax lien at auction.

Bidding Down the Interest
The bidder is not bidding for the purchase price of the lien, but for the interest rate that is acceptable in return. A preset maximum rate is established by the tax authority and buyers are free to accept a lower rate. This strategy requires analysis of the probabilities involved, such as the period of time taken for the tax payer to satisfy the debt, the possibility of the investment duration running the full extent of the redemption period, and the possibility of foreclosure.

Bidding Down the Ownership
This involves the investor changing the character of the debt by altering its value. If the tax authority is only able to recover a portion of the debt owed, the investor will acquire the lien at that discounted price, but will only receive that amount in principle and not be entitled to the full value of the lien on redemption.

Random Selection
A computer or official of the tax administration will randomly select an investor and offer that person a lien on specific conditions. If the offer is refused, another investor will be randomly selected.

Premium Bid
The investor bids a premium over the price of the lien. Here caution needs to be exercised, as the investment may not be entitled to interest on the premium but only the lien amount. As a precondition to this type of purchase, the interest rate return needs be of sufficient magnitude in order to recover the premium over the price of the lien effectively.

Rotational Selection
Often described as the fairest way to auction liens, this system has each investor being offered a random lien. If the lien is refused, the lien is offered to the next investor.

Over the Counter
This necessarily dispenses with the auction process and is effectively a lien purchase directly from the taxing authority. Due to the absence of any bidding process the investor often receives the maximum interest rate that is preset by the authority.

As would be expected, the premium paid for the tax lien will represent the investment in full and is required to be paid immediately after purchase. As this represents a fraction of the security on which it is held, it is a highly leveraged investment.

There may be procedures to follow after the lien is purchased with corresponding deadlines to meet in order to establish ownership of the lien and secure its existence in accordance with due process. It is important for the investor to have prior knowledge of the procedure applicable to the jurisdiction in which the lien is purchased, and to act in a timely, expedient fashion.