Right now there are tax lien sales going on in three different states where premium is bid for tax liens. “What is premium,” You might ask, since at many tax lien sales it’s the interest rate that is bid down at the tax sale. Premium or “over-bid” as it is referred to in some states is an amount over and above the amount of the tax lien that is bid in order to get the lien. In this case it is the investor who is willing to pay the most amount of money for the tax lien that is awarded the bid.

The three states that have tax liens this time of year in which premium is bid are Colorado, Indiana, and New Jersey. Each of these states treat the premium bid differently and it’s very important to know what happens to the premium you bid before you bid at the tax sale in any of these states. Each of these states also have at least a few counties or municipalities that conduct online tax sales. Here is a short summary of what happens to the over-bid or premium for tax liens in each of these states.

Colorado

Colorado counties actually have 2 different methods of bidding for tax liens. They use a round robin bidding procedure for smaller liens and the premium or “over-bid” method for larger liens. Each county decides what the cutoff point is, in other words which liens are sold by the round robin process – which is usually only done live, even if they have an online tax sale. And which liens are sold by premium bid. In Colorado the premium is kept by the county and the investor does not get his or her premium back when the lien redeems. This effectively lowers the rate that is received on the certificate amount. In fact an investor can lose money if premium is paid at the tax sale and the lien redeems right away.

Indiana

Indiana counties do return the premium to the investor – with interest, upon redemption of the tax lien certificate. Interest on the premium and subsequent tax payments have been reduced to 5% per annum. If you want to win bids in Indiana you will have to pay higher premiums than in Colorado. Remember you are getting the premium back with interest should the lien redeem, so the premium you bid does not reduce the interest that you make on the certificate amount (which is still 10%).

New Jersey

New Jersey is really a different animal. It’s the only state where the interest rate on the certificate amount is bid down (to 0%) and then premium is bid. The premium is returned to the investor should the lien redeem within 5 years, but no interest is paid on the premium amount. You will find that very high premiums are paid for NJ tax liens.

Why are investors willing to pay high premiums in NJ since they are not getting any interest on the certificate amount or on the premium? The reason that investors pay high premiums in NJ is because the lien holder is able to pay the subsequent taxes and get the statutory rate (18%) on all the subsequent taxes they pay. So they are getting a blended return on their investment.

There is also a 2-6% penalty (depending on the amount of the lien) that is applied to the redemption amount in addition to any interest that was bid at the auction. So, even if premium was bid and there is no interest paid on the certificate amount. As long as the certificate amount was $200 or more, there is a penalty paid on that amount upon redemption.