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?
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).
How To Invest In Tax Liens
This is part 3 in our 4 part series on investing in tax liens. In the 1st part of our series we gave an overview of tax lien investing, discussing their unique, superior subordination position against other lien types. In Part 2 of our series we discussed three ways to acquire a tax lien in New Jersey. This post will elaborate on part 2, going into further detail about how to acquire tax liens. We have compiled this series into an e-book about tax lien investing, which you can download here.
Acquiring A Tax Lien Through Assignment
One way to acquire a New Jersey tax lien is through assignment rather than at the original public auction. This allows an investor to minimize the time of an actual financial outlay. But often it comes with the price tag of having to pay a premium. Most premiums run anywhere from $100 to $10,000, but it could be larger depending on the facts of your particular case.
Users of PropertyPilot.com can quickly identify properties currently facing tax foreclosure in any New Jersey municipality, along with the name of the lien holder and the name of the attorney conducting the foreclosure. From that point, all it requires is negotiation of assignment and then a substitution of your name for the prior lien holder’s name in the already-existing foreclosure lawsuit.
Stepping into an already-existing foreclosure can shorten the investment time-frame but again the investor should do some homework, as mentioned above, in order to minimize risk and ensure maximum profit.
Acquiring A Tax Lien Through Redeemable Interests
An alternative method of acquiring an assignment is to search existing tax foreclosures and identify “redeemable interests” that are named in the foreclosure complaints. PropertyPilot.com provides an instantaneous link allowing a user to open the foreclosure complaint on their computer screen and see any and all named redeemable interest” holders. These generally include prior tax lien holders and/ or mortgage holders.
An example might make this concept easier to grasp. In 2002 a tax lien (for illustrative purposes let’s call it “tax lien 2002”) might have been sold against a property at public auction; but that tax lien holder later failed to pay the subsequent taxes when they came due, resulting in a subsequent tax lien being sold several years later (let’s call it “tax lien 2007”). In 2011, the tax lien holder of “tax lien 2007” filed a foreclosure and named the prior tax lien holder of “tax lien 2002” as a Defendant.
The prior tax lien holder is named because he holds a “redeemable interest” and has the right to redeem the subsequent “tax lien 2007” and roll that amount into his total lien balance owed by the owner. But if the holder of “tax lien 2002” has not followed up or paid the subsequent taxes, it is likely they have either abandoned their lien or do not have the current funds to redeem the subsequent taxes, and thus such tax lien holder is probably ready, willing and able to make an assignment of his “tax lien 2002” for its full value or possible even for a discount.
USE PROPERTYPILOT TO FIND TAX LIEN OPPORTUNITIES
PropertyPilot.com provides the data to search for these types of abandoned liens and contact such prior tax liens holders to see if they would negotiate an assignment. Once an assignment is made, the investor could either redeem the subsequent tax lien or take an assignment of that, too, and complete the already-existing foreclosure. But careful attention should be paid to the timing of the acquisition of the “redeemable interest” along with the Court’s requirement that notice and judicial review be provided so as to ensure that the assignment is not made for “nominal consideration”.
In a nutshell, one cannot pay a prior tax lien holder $100 for assignment of a tax lien with a redemption value of $12,000; but upon proper notification of and review by the court of the impending sale and assignment of a tax lien with a $12,000 redemption for a purchase price of $5,000, the sale would be permitted under NJ law since $5,000 would be considered to satisfy the “nominal consideration” standard.
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