Tax liens in Illinois paying 36 percent?

There is a lot of excitement in the tax lien community over investing in Illinois, because there is a potential for a 36 percent return. Illinois is a tax lien state, which means you buy tax liens at auction, but it works a little differently there. Here in Indiana, for example, the interest rate is the same, and you bid based on a starting amount equal to the back taxes, and highest bidder wins the lien and the right to collect interest on the amount paid.

But in Illinois, it works backwards. Instead of bidding based on the amount of the back taxes, you bid on the amount of penalty you are willing to receive, starting at 18 percent and going backwards. The 18 percent is good for six months, which makes the maximum potential 36 percent a year.

Now this is quite a bit more than the ten percent you get here in St. Joseph County, so why aren’t I running across the border every year? Because everything is not as it seems. At first glance, it looks like you’re going to go to the auction, and walk away with 36 percent on your dollar. In reality, almost nobody ever gets that. That’s because you’re bidding on the percent return. The bidding starts at 18 percent, the next bid might be 16 percent, and it can–and often does–go down to the single digits. It can get very competitive, especially in Cook County (Chicago).

If you attend one of these auctions, you may even see the bizarre occasion of a zero bid. Zero!? Why on earth would anybody place a zero bid at a tax lien auction? The theory is that doing so prevents anybody else from outbidding you, and you have a claim on the lien in the event that the property is not redeemed, and you will gain title. This strategy is sort of like playing the lottery–if you buy enough liens at zero percent, eventually a few will fall through and you’ll get title. Ultimately though, it’s tying up a lot of money in the meantime. The fallback of getting some interest on your money in case the owner redeems is a better position in my opinion.