Tax Lien Certificates & Endorsements

If you attend an auction to obtain a tax lien, and it's rate of return is 25% then lets say for example the lien is for 100.00........so 25% of 100 is 25.00 , so you would get paid back 125.00 meaning you made 25 bucks of the deal.....am I right so far? So...if you are bidding on the tax lien, and the bid goes up to 125.00, then you wouldnt make any money off the lien? Or would the tax payer, then be obligated to pay you the 125.00 plus 25% interest on that? Or am I wrong all together? I'm just trying to understand how this works. If that is right, and you paid 125.00 for the lien, and they are only required to pay you 125 then, are you just banking on hopes of obtaining the property after the redemption period if they fail to pay?

You do not get repaid for a premium bid in a tax lien sale. It is just money paid to win the tax lien and the county will pocket it. You will want to make sure that your that your rate of return will be high enough to compensate you for this extra amount of money and hopefully put more than that in your pocket.

Also, the interest is paid annually, so if the tax lien certifcate is paid off in 1 month and you were banking on 25% annually, then you will get 2.1% return on your money for one month. If you paid a premium above this amount earned then you would be in the negative.

With an endorsement, you will not have to pay a premium and you will not have to worry about bidding down interest if that county operates that way. It will be the set amount of interest that you recieved the previous year.

Endorsements can be inflicted upon a tax lien certificate buyer too. In some counties it is required that that investor pays all future taxes if they go unpaid by the tax payer. In some cases, it can be okay, but in others it could not be cost effective or start costing too much for this property or be too risky to have so much money invested in one property potentially with a lower rate of return then desired.

Hi Derling thanks for all these useful posts, i have a question about how they calculate the interest rate.
if the annual rate is 25%, how do they get 2.1% if paid off in the first month?
and if that is the case, does the interest rate multiplies after a year by month? so i'll be getting 50% on the second year instead of 25%?
thanks
i've read some articles online saying that it can multiply up to 300% in some cases, but i have no idea what they're talking about..

The 2.1% is what one months of interest is out of a 12 month accruing period. So if you waited 12 months you get 25%, but if you wait 6 months you get 2.1 x 6 mos = 12.6% interest. Does that make sense?

In cases where it could get up to as high as 50% ( I have not seen 300% ever) then they are offering a stepped interest over the duration of the redemption period. Let;'s say you have a 3 year redemption period. year 1 you get 12%, year two they might increase or step the interest to 15% and the third year they might step the interest to 18%. If you look at the total rate of return you get a total of 45% = 12% + 15% + 18%. It is not for the full duration of the redemption period rather the combined interest rates equal 45%.

Dawn