Don't Buy Tax Lien Certificates Unless You've Done Your
Homework!
I went to a tax sale in an out of the way rural municipality in
New Jersey. Unlike most of the tax sales in New Jersey this sale
was poorly attended. New Jersey is a very competitive state for
tax lien investing so this was an uncommon event. Most serious
bidders arrive an hour before the sale starts. At first, I was
pleased to see, with less than an hour to go before the sale,
that there was only one other bidder there. Then I did my
research on the properties that were left in the sale and I
discovered why other investors didn't bother with this sale. Out
of the thirteen properties that were left in the sale, there was
only one decent property. All of the other properties were
vacant land and when I looked on the tax maps and checked with
the zoning department (this is why I arrive at the sale an hour
early) I found out that none of these properties were build-able
lots. Most of them were land locked and none of them were large
enough to build on, even though one parcel was a three-acre lot.
Since the other bidder there was a professional bidding for an
institutional investor, I decided not to bid on any of the
properties in the sale. I knew that if I bid on the one property
that had a house on it, the professional bidder would bid high
premium for it, so I decided not to bid him down and not to bid
on any of the other properties since they wouldn't be
profitable. I stayed around to see what would happen at the sale.
About fifteen minutes before the sale three other bidders
arrived. These investors were new to tax lien sales and did not
really know anything about them. They asked the tax collector a
few questions before the sale and indicated that they really
weren't there to bid but intended to watch since this was their
first sale. When the sale began the tax collector let us know
which properties had prior liens. Four of the undesirable
properties had prior liens. I was not surprised and this just
confirmed my suspicions that these properties were not worth
bidding on. If they were, then the prior lien holder would have
been there to bid on them, or would have paid the subsequent
taxes and prevented them from being included in the tax sale.
The tax collector announced the first property, and seeing that
no one was bidding on it, one of the inexperienced bidders could
not resist. He bid 18% and was awarded the lien (this was the 3
acre landlocked and undersized lot - you need 5 acres to build
here). The next three properties were struck off to the township
at 18%. The next property was the only one with a house on it
and that went to the institutional buyer at 18%. There were
eight properties left. Another one went to the township. The
temptation to bid and get a get a lien at 18% was too great for
the other two new investors; they bought three liens each, each
one at 18% interest. Fortunately for them, they were very small
liens.
After the sale, I explained to them that they should check the
zoning on properties before they bid on them. The tax collector
does not tell you before the property is sold if it is unusable
property and that is why the owner did not pay the tax. The tax
collector only has to convey that industrial properties may be
subject to the Environmental Clean Up Act, the Spill
Compensation and Control Act, or the Water Pollution Control
Act. And this is usually done in fine print; on the notice of
the sale and the bidder information sheet.
When it come to buying tax liens, and this goes for other states
as well as New Jersey, it's "buyer beware." As the investor, it
is your responsibility to make sure that the property that you
are purchasing a tax lien certificate on is a valuable piece of
property. Even in states like New Jersey, where real estate is
at a premium and has increased in value tremendously over the
last five years, there are still tax parcels that are worthless.
In many areas of the state, municipalities have been steadily
increasing the zoning requirements for all types of properties.
In many rural areas you need a few acres in order to build a
house.
I know that many of you are under the false assumption that if
you are a holder of a tax lien certificate; you are guaranteed
to get paid. This is not true; it is a misrepresentation that is
fostered by real estate infomercials and high priced seminars.
The truth is that no one guarantees that you will be paid. You
are first in line to get paid, but there are circumstances in
which you might not get paid. You do have the right to foreclose
on the property if you don't get paid within the redemption
period, but what if the property is worthless? Than you have a
worthless piece of property that you have to pay taxes on.