Bidding Down the Interest Rate

Bidding down the interest rate is a tax lien auction format where the competition among investors is expressed by accepting lower and lower interest rates on the tax lien certificate. The auction begins at the maximum statutory rate set by the state, and investors bid by offering to accept a lower rate. The investor willing to accept the lowest interest rate wins the certificate.

This auction format is used in states like Arizona, Florida (in some counties), and others. For example, in Arizona, the maximum interest rate is 16% per year. At a competitive auction, bidding might start at 16% and be bid down to 5%, 3%, or even 0% in highly sought-after areas. The winning bidder then earns only their bid rate — not the statutory maximum — when the property owner redeems.

The bid-down format creates a tension between winning liens and maintaining profitable returns. Inexperienced investors sometimes get caught up in the competitive atmosphere and bid rates down to levels that provide minimal returns. Seasoned investors establish a minimum acceptable rate before the auction and maintain the discipline to stop bidding when that threshold is reached.

Despite the competitive pressure, the bid-down format still offers advantages. Even at reduced interest rates, tax lien returns can exceed many traditional investment vehicles. Additionally, the underlying security — a first-priority lien against real property — provides a level of safety not found in many higher-yielding investments. Investors can also target less competitive counties or less desirable properties where rates tend to remain higher.