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TAX LIEN INVESTING 101


WHAT ARE TAX LIENS?

Real estate taxes are a fact of life and in New Jersey each municipality is given the power to assess and collect real estate taxes within its borders. Because a municipality relies on real estate taxes as its main source of revenue to pay for the services it provides to the community such as schools, police, roads, etc., and because municipalities determine how much they will spend every year in their annual budgets based on the amount of real estate taxes they assess and collect, they have a major problem when real estate taxes are not paid on time. So, what happens when someone doesn't pay their real estate taxes? That's where tax liens come in.

Black's Law Dictionary defines "tax lien" as a lien on real estate in favor of a state or local government which may be foreclosed for nonpayment of taxes. Okay, so what does that mean? Basically, it's a fancy way of saying that you can lose your property if the real estate taxes are not paid. In addition, and more importantly, New Jersey law provides that the municipality may charge 18% interest on the amount owed. Sound Extreme? Exactly! Municipalities are given this "hammer" so that real estate owners pay their taxes on time.


WHY DOES THE MUNICIPALITY HOLD TAX LIEN AUCTIONS?

Okay, so you understand what tax liens are and how they work and it all sounds great for the municipality, but what connection do you have to tax liens? After all, it's a lien in favor of the municipality, not you. That's true, but the reality of it is that the municipalities are more interested in collecting the taxes that are owed than in foreclosing on the property. Remember, municipalities rely on real estate taxes as their main source of revenue to pay for schools, police, roads, etc. and they can't afford (literally) to wait to be paid. This basic fact did not escape the New Jersey State Legislature which passed a law that gives municipalities the right to sell their lien to the highest bidder at an auction. This way, municipalities get what they really need - paid tax bills and the funds they need to pay for the services they provide!


WHAT'S IN IT FOR ME?

If you purchase a tax lien, you acquire all of the rights that the municipality had against the delinquent property owner including the right to charge and collect interest (up to 18% per year) on the amount you paid to acquire the tax lien. Moreover, you also acquire the right to foreclose on the property. In addition to the interest, if the lien amount is greater than $200, the winning bidder is entitled to a surcharge of up to 6%. In other words, if you are the successful bidder, you can earn up to 24% in the first year! Not too bad is it?

If you're thinking "that's a great return on my money, but there's probably a lot of risk involved," you couldn't be more wrong. That's because the best part of tax lien investing is that because you purchase the municipality's lien, your lien has the highest priority permitted by the State of New Jersey. In other words, your lien will be superior to every other lien (including any and all mortgages) except Federal liens. Basically, after you purchase a tax lien, you are all but assured that you will either get your money back plus a very handsome interest rate (up to 24% in the first year) or you will acquire the property for pennies on the dollar!


THE AUCTION

Tax lien auctions in New Jersey are simple. Simply show up at the auction and bid. The winning bidder is the bidder that is willing to accept the lowest rate of interest on the tax lien that is being auctioned. If there are still bidders left when the interest rate has been bid down to 0%, the highest bidder is determined by the bidder that is willing to pay the highest premium.

And the best part of it all is that because municipalities are required by law to give public notice of all auctions before they happen, each and every investor has the opportunity to buy each and every lien. In other words, the "little guys" can't be left out in the cold while the "insiders" buy up all of the liens.

Now all you need to know is when the tax lien auctions are held. That's where NJTaxlieninvestor.com comes in. Until now, tracking down tax lien auctions was one of the most frustrating and difficult aspects of tax lien investing. But, thanks to NJTaxlieninvestor.com, finding the auctions is now as easy as logging onto the internet.


IS THIS SOME NEW GET-RICH-QUICK SCHEME?

Absolutely not! Tax lien auctions have been around in the United States since the early 1800's and have been on the books in New Jersey for well over 75 years. Moreover, the purchase of tax liens is all governed by statute. Translation: all tax lien auctions are regulated and controlled by the State of New Jersey. On top of that, your investment is 100% secured by real estate, which by definition is worth significantly more than your investment (since most tax rates are about 2% - 3% of assessed value). Quite frankly, we can't think of a more time-tested, low-risk, high-yield investment.

If you're thinking "Okay, it's a great investment, but there's probably only a few tax liens for sale," consider these facts - there are 566 municipalities in New Jersey that conduct tax lien auctions and it is currently estimated that over 8 billion dollars worth of tax liens are sold each year across the country. We'd say your odds are pretty good. All you need is the opportunity!


*The foregoing is a very basic primer on tax lien investing in New Jersey and is not intended to be a comprehensive discussion.