Investing in New Jersey Tax Liens & Three Ways To Profit From New Jersey Tax Liens

From Property Pilot comes: Investing in New Jersey tax liens is extremely lucrative. Not only do tax liens return high interest rates for the lien holders, but large profits can also be made if an investor buys a property “out of tax foreclosure”. The trick to succeeding lies in finding the properties that provide these money-making opportunities while weeding out the properties that lack sufficient equity. Knowledgeable investors turn to data sources that provide up-to-date information as to the property, the foreclosure and comparable sales before making an investment decision. These same investors also know the rules of the game and know how to profit.

Investing In Tax Liens Can Be Extremely Profitable With The Right Information

In New Jersey, tax liens are sold at public auction when a property owner fails to timely pay the municipal taxes or the municipal sewer and water bill. Investors purchase tax sale certificates (aka “tax liens”) because they generate substantial interest income – usually at 18% interest plus allowable costs and fees. Additionally, when subsequent taxes go unpaid the investor (aka the “tax lien holder”) can also pay such subsequent taxes and roll those amounts into the total amount owed. These, too, gain interest at 18%. Sometimes the initial interest rate on a tax sale certificate is lower than 18%. This is usually done in order for a bidder to outbid the competition in order to acquire the certificate. For instance, the bidding at public auction will start at an interest rate of 18%. But if the bidding is competitive and the rate is bid down to, for example, 10%, the winning bidder will earn only 10% interest on the initial certificate. However, the subsequent taxes paid remain unaffected and this same tax lien holder will generally receive 18% interest on these subsequent amounts.

After 2 years, if the property owner has not paid back the amounts due (principal, interest and costs) then the tax lien holder can institute a foreclosure action. In some instances, such as with “abandoned properties”, the foreclosure action can be filed earlier than 2 years. In essence, the foreclosure action contains a demand that either (a) the homeowner pay back the amounts due (principal, interest and costs), or (b) the homeowner and all inferior lien holders will be stripped of any and all interest in the property and title will transfer to the tax lien holder.

Tax Liens Are Generally Superior To All Other Liens.

With few exceptions (for example, an environmental spill fund lien), in New Jersey tax liens are superior to all other liens and judgments, regardless of the timing of such liens and which came first. This means that a tax lien holder who bought a tax lien in 2009 and forecloses in 2012 will strip title from an owner who bought the property in 2005.

Moreover, if this same owner obtained a mortgage loan from Bank A in 2005 and a second mortgage loan from Bank B in 2007, the tax lien holder’s judgment (based upon the 2009 tax lien) will strip both mortgages from the property, too.

How could this large gain occur for a minimal investment that was held for only 3? Simple: if no one redeems (pays off the tax lien by the Court-established deadline in the foreclosure action) then judgment will be entered.

Mortgage lenders and banks generally have the right to pay the tax lien and then roll the amounts paid into their loan balance due; but with so much financial mismanagement occurring due to banks merging and mortgage portfolios being repackaged, bought and sold, it is not uncommon for mortgage lenders to miss the important foreclosure deadlines, and thereby forfeit their liens. The key to profiting is to watch these actions, have updated data and have a plan of action.

Three Ways To Profit From New Jersey Tax Liens

1. Bidding On A Tax Lien. The first and most straightforward way to profit with the tax lien industry in NJ is to attend the public auctions and competitively bid to acquire a tax lien. You will earn the rate of interest originally bid on the initial investment (as stated above, competitive bidding may drop this rate below 18%) and you will earn 18% on subsequent taxes paid.  You can also claim certain costs and fees (for example, the cost of recording your lien). If your tax lien is not redeemed within 2 years, you can foreclose. This will cost you attorney fees for filing the court action, but you can claim a portion of attorney fees and costs in your redemption amount. And of course, if no one redeems then you own the property once you obtain your judgment.

2. Acquiring a Tax Lien Through Assignment

Tax liens are freely assignable. You can buy a tax lien that is ripe for filing a foreclosure action from an investor who bought it years ago. You might also find a tax lien holder who is named as a Defendant in another foreclosure action but has failed to keep active on paying the subsequent taxes, or who has decided to cash in now rather than invest more time and money for a potential larger return in the future.

Often investors will sell and assign their tax liens for redemptive value plus a small “premium”. This alternative allows an investor to avoid tying up their money for the early years of the investment, and requires a financial outlay only after the tax lien becomes ripe for a foreclosure.

3. Buying A Property “Out Of Foreclosure”

The third way to profit is to actually buy the property facing foreclosure. Owners will often sell for less than market value in order to reap some gain before all equity is lost. The key to succeeding here is to identify those properties that have equity, and then to legally satisfy all debts and obtain title and possession for less than market value.

Let’s explore the three options set forth above in further detail, because there are pitfalls to be avoided in order to profit within the tax lien industry. The first option is quite simple, but there are still considerations to be made when bidding. How much are the yearly taxes? How valuable is the property? What do the recent sales in the neighborhood indicate?

FIND TAX FORECLOSURE DATA USING PROPERTYPILOT

All of this data could be obtained through the use of PropertyPilot.com. An investor who buys a tax lien will likely have to pay an initial 6 months or 1 year of taxes for acquisition of the tax lien, plus an additional 2 years of subsequent taxes before foreclosure can be filed. A foreclosure action could typically cost an average of $1,500 to $3,000 depending on how many defendants are required to be named (which would be determined through a title search – an additional $300 cost).

Is there any additional information known about the property, such as whether the owners have died, moved, abandoned the property, etc., so as to improve the odds of the tax lien holder completing the foreclosure rather than merely being paid back their interest? Is the property listed on the NJ Department of Environmental Protection’s list of contaminated properties, possibly adding subsequent costs for clean-up? Are there any visual aspects of the property that cause alarm?

In the end, an investor will have to decide whether the estimated return outweighs the costs, both known and potentially unknown. To minimize risk, savvy investors seek to acquire the most information possible. As stated above, PropertyPilot.com allows a user to obtain mounds of data regarding a property including its assessed value and estimated market value, yearly taxes, contact data for the owners, mortgage data and even neighborhood information.It also provides comparable sales data of like-kind properties with adjustable and searchable limits as to radius of search area (from .25 of a mile to 3 miles radius) and sales dates (from 3 months to 3 years).