The following definitions are excerpts from the free online eBook Lien Baron's Tax Lien Investing Secrets.
Bid Up or Premium Bidding
Bidding starts at the amount of back taxes owed along with any associated feeds. The bid is then raised in a "standard" auction format as bidders compete for liens or deeds. In this way, you may end up paying $2000 to win a $1000 tax lien. The additional $1000 is the premium you paid. Consider it another up-front investment on potential earnings. Whether or not premium bidding is a good choice for you often depends on how high the bids go and how the county charges interest. Some counties charge the property owner the same set interest on both the lien and the premium. Some counties charge interest on both but the interest on the premium is lower. Still other counties will add the premium to the total owed by the property owner, but only charge interest on the original lien. The worst-case scenario (and one instituted by very few counties) is that the premium is simply paid by the bidder to secure their rights to interest on the lien. In other words, your premium goes directly to the county but is not also charged to the property owner. It is best to identify what kind of up bidding each county is doing prior to raising your card, or you may be in for a few nasty surprises.
Bid Down Bidding
With this style of bidding, all bidders agree to pay the back taxes and fees but secure the right to collect interest by bidding down. That means that the investor willing to accept the lowest interest rate on their lien will win the right to purchase it. The county makes no additional money from this method and only receives the back taxes owed as the purchase price of the lien. For this reason, bid down bidding is the friendliest for small-time investors, assuming that corporate investors are not present. Unfortunately, corporate bidders are more about quantity than quality and thus are willing to take lower rates on a dozen properties rather than haggling over a high rate on one property. They may drive the bidding down to the point that the earning potential makes it a bad risk for independent investors.
In random selection, the “auctioneer” (always an unbiased county official) proceeds down the list of liens by randomly draws bidder numbers from a container and asking if that person would like to purchase that lien. If they say no, the official draws another number. If they say yes, then they have won the lien.
Rotational bidding is similar but less random. The official begins at the top of the lien and bidder lists and asks each bidder in turn if they are interested in each lien. For example, when the first lien comes up, the official will ask the first bidder if they want to purchase it, and then proceeds down the list until someone does. When the second property comes up, the official will begin with the second bidder and proceed in the same fashion.
This style of bidding is best avoided if at all possible, unless you feel sure that the competition will be low on your desired liens. Ownership bidding is similar to bid down, except instead of agreeing to a lower interest rate you are agreeing to a lower percentage of property ownership. While the interest rates offered on liens purchased this way are some of the most attractive, the ownership bidding system reduces your ability to ensure payment making it almost impossible to foreclose on a property because you are not entitled to 100% ownership.