Premium Bidding
An auction format where investors bid amounts above the base lien value, with the premium paid typically being non-refundable and non-interest-bearing.
Premium bidding is an auction format used in certain tax lien sales where investors bid amounts above and beyond the actual tax lien amount. The "premium" is the difference between the winning bid and the base amount of delinquent taxes. This bidding method is used in several states, including Florida, as a way to manage high demand for tax lien certificates.
In a premium bidding system, all investors earn the same statutory interest rate on the base lien amount. The competition is expressed through the premium — the amount an investor is willing to pay over and above the lien. The critical detail that many new investors overlook is that the premium is typically non-refundable and does not earn interest. This means you need to factor the premium cost into your overall return calculation.
For example, if a tax lien has a face value of $2,000 and you win it with a premium of $3,000, your total investment is $5,000. However, interest only accrues on the $2,000 base amount. If the property is redeemed, you receive back the $2,000 plus interest plus your $3,000 premium — but no interest on the premium portion. This significantly reduces your effective rate of return.
Understanding premium bidding dynamics is essential for maintaining profitable investing. Experienced investors carefully calculate their maximum premium based on the interest rate, expected redemption timeline, and their target return on investment. In competitive markets, premiums can become excessive, and disciplined investors know when to walk away rather than overpay.