Colorado Online Tax Lien Sales

Fall is the season for the tax lien sales in Colorado. Did you know that 12 of the Colorado counties have their tax sale online? These tax sales are different from other online tax sales. In Colorado premium is paid for tax liens. That means that the interest rate is not bid down. Instead an amount is bid over and above the lien amount, that the investor is willing to pay in order to get the lien. So if you are the successful bidder you will pay the premium amount that you bid plus the amount of the lien. No interest is paid on the premium amount and the premium is not returned to the investor when the lien redeems. So the premium paid will effectively lower the amount of interest that the investor will get when the lien redeems.

Another thing that makes the Colorado tax sales different from tax lien sales in other states is that the interest rate can change from year to year. The interest for Colorado tax liens is 9 points over the prime lending rate and is determined on September 1 of each year. In 2010 and 2011 the rate was determined to be 10% and it hasn’t been that low since 2002. You do get to pay the subsequent taxes in Colorado and you get the default rate at the time that you purchased the lien on your subsequent tax payments. So one reason that investor are willing to pay premium for tax liens is that they know they can pay the subsequent taxes and get the full amount of interest any additional payments they make, even though they may have paid enough premium that they are not making any profit on the certificate amount.

For example if you purchase a tax lien with a face amount of $2000 and you pay $200 premium for the lien, and the lien redeems after one year then you effectively don’t earn anything on your money, but you don’t lose any money either. If the lien however redeems after 6 months, then you get back the lien amount and 6 months worth of interest – which is $100, but you paid $200 premium, so essentially you lost $100. But if the lien is not redeemed until the 3 year redemption period is over and you pay the next 2 years of subsequent tax payments (assuming the annual taxes are also $2000/year), then you will get back the lien amount and subsequent tax payments plus interest earned.

Your Investment Your Return (assuming the tax sale was in Nov)
Lien amount: $2000 Lien amount: $2000
Premium: $200 Subsequent Taxes: $4000
Subs paid in Aug of 2nd year: $2000 Interest Earned: $1380
Subs paid in Aug of 3rd year: $2000
Total Investment: $6200 Total Return: $7380
Total Return - Total Investment = $7380-$6200 = $1180 Yield = 1180/6200 = 19% (over 3 years)

Your profit would be $1180 dollars and your yield is 19% over 3 years. You can’t really annualize this number though because you actually invested over a 3 year period and not just at one time. You actually earned 0% in the first year because of the $200 premium that you paid and 10% in the second year and in the third year.

What you want to remember when you’re bidding on Colorado tax liens is that you can lose money if you bid premium and the lien redeems before you make much interest. Like in the second example above where a 10% premium was paid and the lien redeemed in 6 months. Because the interest is annualized and would only amount to an effective rate of 5% you lose $100 in this example. If the lien is held for at least a year, you break even and if the lien is held for the full 3 years, you get a nice return as in the final example above.