There are states that apply interest or penalties, while there are also states that impose penalties in addition to interest rates. Take New Jersey as an example, you have the interest rate you’ve quoted on the certificate plus the penalty, and then you’ll get the maximum interest without a penalty on subsequent taxes. Whereas in other states, like Florida, you only get either the penalty or the interest rate, not both.
Now a penalty is different from the interest rate in that it is paid overtime and is typically annualized in most states such as New York and Illinois. It is being calculated over a period of 6 months. In Florida and New Jersey, for example, if the maximum interest rate is 18%, that means the interest is 18% each year, not 18% directly on your investment. Differently, in Illinois, the interest rate will still be 18% but it will be for 6 months. If in case the tax lien is maintained throughout the year, the investor will earn 32% interest. But if it is going to be redeemed in just 1 month, the investor will only receive 3% of the investment from him.
In Texas, where you buy redeemable tax deeds, you will receive a penalty but no interest on your money if the tax deed is redeemed. The redemption period is 6 months for non-agricultural and unoccupied properties and the penalty is 25%. So if you buy a redeemable tax deed and it will redeem after 6 months, you’ll get 25% of your money. If you redeem in just 1 month, you’ll still get 25% of your money back.
Before bidding, always know if the state gives interest or a penalty, or both.
