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Interest That Isn't: How Bid-Down, Premium, and Flat-Penalty Structures Change the Real Yield

Four structures, four different products

Our dataset records at least four distinct ways a tax-sale position gets paid: bid-down interest (Florida, Arizona, Ohio, Alabama lien counties, and others), fixed statutory interest (Iowa 24%, Kentucky 12%, Nebraska 14%), premium bidding where the extra money earns nothing (New Jersey at 0%, Colorado, Mississippi, Missouri, Maryland), and flat penalties or premiums (Texas 25%/50%, Georgia 20% + 10%, Indiana 110%/115%, Florida's 5% minimum). Comparing states by their largest printed number mixes all four. The worked examples below use one obligation — $10,000 — run through each structure, with the arithmetic shown so you can re-run it on your own counties.

Worked example 1: Florida bid-down, with the floor

Florida bidding starts at 18% and drops in quarter-percent increments; suppose competition takes your certificate to 5%, and the owner redeems in exactly 6 months. Accrued interest: $10,000 × 5% × 0.5 year = $250. But Florida's mandatory minimum penalty of 5% applies on redemption of most certificates, so you receive $10,000 + $500 = $10,500, not $10,250. Effective yield on the half-year: 5%. Annualized simply, roughly 10% — double the bid rate, courtesy of the floor. Now run the uncontested case: you win at the full 18% and the owner redeems in 6 months. Interest: $10,000 × 18% × 0.5 = $900, which exceeds the $500 floor, so you receive $10,900. Same state, same certificate size, and the 6-month yield is either 5% or 9% depending entirely on the auction, not the statute headline.

The floor also inverts the usual logic at very low bids: a certificate won at 0.25% and redeemed in one month accrues about $2 of interest ($10,000 × 0.25% × 1/12) but still pays the $500 minimum on most certificates — a 5% return in a month, before anyone calls it a 0.25% investment. Florida's structure quietly pays for speed; the rate you bid mostly matters on slow redemptions.

Worked example 2: Iowa's fixed rate and Indiana's tiers

Iowa pays 2% per month, 24% per year, fixed by statute — the rate is not bid down; bidders compete on the undivided interest percentage instead. The same $10,000 redeemed in 6 months pays $10,000 × 24% × 0.5 = $1,200 of interest, $11,200 total, with no auction discount to model. The yield question in Iowa is not 'what rate will I win?' but 'will it redeem, and when?' — a different risk entirely.

Indiana pays no bid interest rate at all. Its return is penalty-based: 110% of the minimum bid if redeemed within 6 months, 115% if redeemed after 6 months and within the 1-year period, plus 5% per annum on the portion of the purchase price above the minimum bid. Take a $10,000 minimum bid won with a $2,000 overbid ($12,000 total paid), redeemed in month 8. Penalty portion: 15% × $10,000 = $1,500. Overbid interest: $2,000 × 5% × (8/12) = about $67. The overbid principal itself is returned. Total received: $12,000 + $1,500 + $67 = $13,567 on $12,000 paid — about 13.1% over 8 months. Note what did the work: the flat 15%, not the 5% — Indiana's printed '5%' is the smallest number in its own formula.

Worked example 3: premium that earns nothing, and a premium that is everything

New Jersey bids interest down from 18%; when bidding reaches 0%, bidders compete by premium, and the premium earns no interest, is returned only if the owner redeems, and escheats to the municipality if there is no redemption within 5 years. Pay a $2,000 premium to win a $10,000 certificate at 0% and get redeemed in a year: you receive $10,000 + $2,000 back = $12,000 on $12,000 paid. Yield: 0%, for a year of lockup. Colorado is harsher on the same shape: the premium is not refunded on redemption at all and earns no interest, so it must be recovered entirely from interest on the tax amount at Colorado's floating rate (Federal discount rate plus 9 points; 14% for the October 2025-September 2026 period in the dataset). A $2,000 Colorado premium against $10,000 of taxes at 14% needs more than 17 months of accrual ($10,000 × 14% = $1,400 per year) just to break even on the premium.

Texas is the mirror image: the 'interest' is a flat 25% redemption premium on the aggregate amount in year one. A $10,000 aggregate redeemed in month 2 pays $2,500 — a 25% return in two months, roughly 150% annualized on simple math, and the same $2,500 if redeemed in month 11. Flat premiums pay for the event, not the duration; accrual systems pay for duration, not the event. Knowing which one you own is the entire skill this article is about.

How to compare honestly

Reduce every structure to the same three questions before comparing states. What base does the percentage apply to — the taxes only, the full purchase price, or a capped amount (South Carolina caps interest at the Forfeited Land Commission bid; Mississippi pays 1.5% per month on taxes and costs and nothing on overbid)? What happens to money bid above the obligation — returned with interest (Indiana, 5%), returned without interest on redemption only (New Jersey), or gone (Colorado)? And is there a floor or a flat amount that dominates short holds (Florida's 5% minimum; Texas's 25%)? A state that wins on the rate card can lose on all three answers.

LienToDeed's state pages publish the structure alongside the rate for exactly this reason, and Bidder ($49/mo) and Pro ($99/mo) alerts carry the mechanism with each listing. The dataset does not publish realized winning rates by county — no honest source can promise those in advance — so underwrite the structure you can verify and treat the winning rate as the variable your research, not a rate chart, has to estimate.