Tax Lien$ - The Complete Guide to Investing in New Jersey Tax Liens - Book Excerpt
Tax liens are not sold like other, more common investments. There are no “listings” in the financial pages of your newspaper, and you cannot just call your broker as you would to but a stock, bond or commodity. There are no sales commissions, no monthly statements in the mail box, and generally no salesmen or advisors.
Tax lien auctions are the primary way that tax liens are bought in New Jersey. They are usually well attended and can get very exciting. The auction process is always confusing to new-comers, so it is advisable to attend a few auctions before you begin bidding. This will give you a feel for the process and you may get some pointers from some of the more experienced bidders.
Tax lien auctions are generally held once per year in each municipality. There are 566 municipalities in this State so there are plenty of auctions. Unfortunately many tax collectors schedule their auctions in June and December at the end of that town’s fiscal or calendar year, so scheduling becomes difficult and it may be impossible to personally attend every auction that you’d like.
Each municipality holds its own tax lien auction and (in almost every town) each lien is sold individually. The inefficiency of this process enables smaller investors to participate. By auctioning off each lien separately in 566 municipalities, it provides literally tens of thousands of individual investment opportunities for both large and small investors. The retired construction worker has the same opportunity to buy any given lien as the deep-pocket investment firm.
Prior to a tax sale auction, the tax collector is required to create a Tax Sale List which identifies each property that will be subject to tax sale. The list includes a legal property description and the amount due on the lien. The Collector must post public notice of the tax sale in five public places within the municipality and also must publish notice in a local newspaper. Tax lien auctions are different from other typical auctions. Investors do not bid on the price of the tax lien. They bid on the interest rate that will accrue on the money which they pay to buy the lien. The successful bidder is required to pay the outstanding property taxes with interest and penalties as of that date. The auction for each lien is won by the investor who bids the lowest interest rate.
The maximum interest rate is 18% for all liens except smaller liens of less then $1,500 which have a maximum rate of 8%.
For example, the tax collector will announce that the next lien for sale will be on property known as Block 1, Lot 2, and the lien amount will be $4,000. This information would have already been published in the Tax Sale List, so you will have driven past the property and checked on its value. An investor will then open the bidding at 18% which means that person would be willing to pay the $4000, and receive a tax lien with a face value of $4,000 accruing interest at 18% per year. If no one else bids, the lien would be struck off to the first bidder at 18% interest. Not bad.
If there is someone else at the auction who is also interested in buying that lien, he or she must decide whether they’d be willing to pay the $4,000 face value and earn less than 18%. In recent years, demand for tax liens has exceeded supply so there are usually other bidders ready to bid much lower interest rates. The maximum interest allowed is 18% and liens may be bid down to 0%. If the interest rate is bid down to 0%, “premium” bids may be made whereby the purchaser pays more than the amount of taxes that are due. The premium money is held by the tax collector and returned to the investor if redemption is made within five years. If the lien is not redeemed within five years, the premium funds are kept by the municipality. A lien holder cannot recover any premium payment if the certificate is not redeemed within five years.
It is illegal for bidders to make any agreements or deals to reduce or interfere with competition at the auctions. This is known as collusion. You may notice that at most auctions, a bidder will call out “Prior” or “I have a prior” and then the other bidders will usually refrain from bidding. This is not based on collusion or courtesy. As discussed in greater detail in Chapter 6, prior (older) tax lien holders are permitted to redeem subsequent (newer) tax liens so it is fruitless to bid against a prior lien holder. If the prior lien holder is not able to buy the new lien at 18% he or she will simply pay off the new lien and add the cost to the prior lien at 18% interest.
0% Bids & Premiums
By far, the most common question asked by first-time bidders is “why would anyone bid the interest rate down to 0%?” The simple answer is that large investors have discovered tax liens over the past few years, and they have driven the demand for liens beyond the supply. Some investors are willing to accept a very low or even 0% interest rate on the initial investment in order to acquire the tax lien, because they can accrue 18% interest on all future taxes paid on the lien. They will accept no return on the initial investment in order to get 18% return on “subsequent taxes.” Aside from the higher return generated on subsequent taxes, investors earn “penalties” of between 2% and 12% on every tax lien, even if the interest rate is bid down to 0%.
Creation and Delivery of Tax Certificate
A tax lien is automatically created as soon as taxes are past due, but the lien itself is not a physically tangible thing that can be seen, or recorded. The lien is “documented” in the form of a “Tax Sale Certificate” following the auction. Tax Sale Certificates can also be referred to as “Tax Certificates,” or “Certificates of Tax Sale.” It is simply a one-page document form created by tax collectors to memorialize the existence and ownership of a tax lien.
Assignment or Private Sale by Municipality
On some occasions, when no one bids on a tax lien at auction, the lien is sold to the municipality itself. The tax collector will create a tax sale certificate in the typical form and the municipality will be listed as the purchaser. Because no one bid on the lien, these tax certificates always accrue 18% interest.
When this occurs the primary purpose of the law, which is the collection of revenue, is not accomplished. The municipality still needs to convert the lien into cash so it has two options. The municipality can either begin an In Rem foreclosure which will take 4 to 6 months, or it can assign the lien. Municipalities generally do not want to be in the business of owning real estate, and foreclosure is not politically popular, so most municipalities would rather assign than foreclose their tax liens.
Several methods are provided for municipalities to assign (sell) tax certificates which they were forced to purchase at their own sales. Municipalities are required to offer all tax liens for sale at annual auctions, so they only hold tax liens which could not be sold at auction. These liens are often referred to as “Municipally-held” or “Orphan” liens.
In order to make these liens more attractive, the assignment options include some benefits that do not come with tax liens sold at auction. The main attraction is that all assigned liens accrue interest at 18% and foreclosure can be started six months after the date of the auction rather than the usual two year waiting period.
Regardless of which method is used to buy a tax lien, it must be recorded in order to put the public on notice of the existence and ownership of the lien. All tax liens and Assignments of liens must be recorded in the County records in the County where the property is located. Of course, each County Clerk’s Office charges a recording fee.
A tax lien cannot be foreclosed unless the lien is recorded. Tax certificates must be recorded within three months of the date of sale or the certificate will be void against any purchaser, lessee, or mortgagee of the property whose deed, lease or mortgage is recorded before the recording of the certificate.
Make money by paying other people’s taxes! Income tax, sales tax, real estate tax … Michael Pellegrino’s book, “Tax Lien$-The Complete Guide to Investing in New Jersey’s Tax Liens”, will tell you how to invest in high yield New Jersey tax liens that are secured by first priority liens on real estate. Read an excerpt from his book.