As of the time that I'm writing this article there are only 8 states that have that have online tax lien sales. But some of these states may only have one or two counties or municipalities with online tax sale. For that, and for other reasons that I'll let you know about later, these tax sales may not be worth your time. So here are what I consider to the top 5 states for investing in tax liens online:
Florida is a state that is worth looking at for the online tax lien sales. The interest rate in Florida is 18% per year. Most counties in Florida do have online tax lien sales. Tax Sales are held once a year in May and the interest rate is bid down quite low, but there is a minimum 5% penalty, so regardless of how low you bid, if the lien redeems you will get at least 5% on your money . Another plus for investors who do not live in the state is that as long as you do your due diligence and bid on good properties you are not likely to get the property. Instead of foreclosing on the property if the lien does not redeem, in Florida you apply for the lien to go to a sale sale. The property will then be auctioned off in a tax deed sale (some of these are online as well) to satisfy the lien.
Another state that has a default interest rate of 18% per year is Maryland, and while not many counties in the state of Maryland have online tax sales, the City of Baltimore does have a very large online tax lien sale each year. In Maryland the interest rate is not bid down, instead of bidding down the interest rate, premium is paid for tax liens. You do not have to pay the entire premium at the tax sale. You only need to pay a portion of the premium along with the amount of the lien at the tax sale. And only if the lien does not redeem and you foreclose on the property, do you have to pay the remaining premium (and any outstanding taxes). The Maryland counties have a somewhat complicated way of determining how much of the premium needs to be paid at the tax sale (this is known as "high bid premium") and you should make sure you understand this before you bid in any of the Maryland tax sales. There is a detailed description of the formula for high bid premium in the Buying Tax Liens Online course. Another plus for the investor in Maryland is that the redemption period is short – only 6 months in most counties.
Indiana is another state where premium is bid for tax liens and there are a handful of counties in Indiana that do have online tax sales. There is a 10-15% penalty paid on the certificate amount depending on when the lien is redeemed and 10% interest per year is paid on the premium amount and all outstanding tax payments. Not all of these tax sales are the regular tax lien sales, some of them are the county commissioner's tax certificate sales. These are the sales of the liens that did not sell in the regular tax lien sale. What's good about the commissioner's sales is that the amount of the lien is sometimes reduced and the redemption period is also reduced to only 120 days instead of 1 year.
Arizona is one of the most popular states for online tax sales, although last I checked, only 6 of the 15 Arizona have their tax sales online. The default interest rate in Arizona is 16% and the interest rate is bid down at the tax sale. You will need to register in advance of the tax sale and submit a deposit in order to bid in any of these online auctions. Some of the Arizona counties also force you to pay the consequent taxes – if you do not pay them they will sell your lien in the following year's tax sale.
The state of Colorado also has a few counties that have online tax sales, premium is paid for liens in Colorado and the interest rate is only 1% above prime. Colorado tax sales are in November of each year and the interest rate is determined each September in advance of the tax sale. For the last three years it's been only 10%. Keep in mind that any premium paid for tax liens in Colorado will effectively reduce the interest rate received on the tax lien when it redeems. However when interest rates are low – as they are now, investors are due to pay large premiums.
Other States With Online Tax Sales
In the last couple of years the states of Louisiana and Nebraska have also had counties with online tax lien sales. Both of these states have a bidding system that is not in the best interest of the investor. In these states it is the ownership interest of the property – should the lien not redeem, that is bid down. It is simply not a sufficient of an incentive for the owner of the property to redeem the lien if the investor will only own a small piece of the property, so I do not consider these states to be among the best states for tax lien investing .
The newest state at the time of this writing to have online tax sales is New Jersey. In New Jersey, just like all of the New England states, tax sales are conducted by the municipalities – not the counties. So there are more sales (over 500 annually) in New Jersey then in some other states. But most of these tax sales are very small – some of them with only a hand full of liens sold to investors. I did not include New Jersey among the 5 top states to invest in tax liens online for three reasons.
First, at this time only two New Jersey municipalities have online tax sales. And while the larger cities follow their lead in the future, I do not think that most of towns will have online tax sales any time soon.
Secondly, the bidding procedure in New Jersey is a little more complicated than in other states. The interest rate is bid down, frequently to 0%, and then premium can be paid for tax liens. The institutional buyers do this because once they have the lien, they can pay any current or future taxes when they become delinquent and get the maximum interest rate (18%) on these payments. So they are paying premium and getting no interest on the lien amount for the right to receive 18% on any future taxes that they pay. The problem with this for the individual investor is that if the liens redeems in a short period of time, you may not get to pay any of the outstanding tax payments.
And thirdly, bidders need to have at least $ 10,000 in order to bid at these auctions. Even though you only need to place a deposit of $ 1,000 in order to bid at the tax sale, the online auction company accounts that this deposit is 10% of your budget. So you need to have at least $ 10,000 in your account to make payment for successful bids.