Here’s another example of the 95/5 Law when it comes to investing in Tax Lien Certificates.

What’s the normal procedure you go with when bidding at an auction?  In a regular auction the bidding starts low and goes higher.  Variables include:

•    Appraised or known value of the object being auctioned
•    The potential to appreciate in value after the purchase
•    The total number of bidders for the item
•    Ability to pay for the item with a winning bid

The usual method of acquiring Tax Lien Certificates is an auction and all the criteria listed above are correct.  However, the contradiction exists on how much interest a certificate will pay when auctioned off.

In some cases, the process of bidding for Tax Lien Certificates starts with the highest rate of return and the competition for that certificate bids the interest down!  The normal high stakes game of chicken that bids the price up is reversed with this investment.

It’s not a perfect system, but the attendees at the auction ultimately determine what the rate of return is on each property secured to a tax lien certificate.

So, while 95% of people who attend an auction drive the price up, the 5% of the largest financial institutions and wealthiest individuals actually drive the price down but still end up with an above average, secure rate of return.