TAX LIENS IN NJ
(July 2010) By Victoria M. Brown


Purchasing and Foreclosure

  1. TAX LIEN ACQUISITION
    1. THE AUCTION PROCESS - owners cannot buy their own tax liens

      IN GENERAL:
      1. Each municipality sells tax liens each year. Call for when the sales are - usually just before end of the tax year - eg. June or December
      2. Town publish legal notices as to when their tax auctions will be held
      3. Each property is auctioned separately so anyone can come and bid
      4. Bidding is very competitive and there are institutional bidders with unlimited funding
      5. Before you go and bid, do a "chart" on the return you can get and mark down your lowest bid - do no go lower at the auction even if tempted because the bottom line is the rate of return not winning at auction
      6. Before bidding on a property do a drive by and if you can afford it - a title run down -(most bidders do not do the title run down as expensive and because the law guarantees priority lien).
      7. Run down property, abandoned properties, Estate properties, problem properties may never get redeemed - and are more likely to go to foreclosure
      8. Undesirable properties - vacant land, contaminated land, a building in such bad condition that it may be demolished or condemned. (If demolished, the city's cost to demolish takes priority over the tax lien)

    2. THE BIDDING PROCESS
      1. Before you go to the auction call the tax collector and see what forms of payment are acceptable and if you will have a few hours after auction to get certified checks. Most bidders bring a few certified and bank checks of different denomination and cash. Most towns require payment immediately and if not the bidding is re-commenced.
      2. The process is very quick and follows the town's list. Have this list in advance and check the night before or the morning of the sale which properties have been paid up and are to be x'd off the list.
      3. The bidding is so fast some new bidders bid on the wrong property.
      4. Bids are different from any other kind of auction. Tax liens earn 18% interest. Thus the bidding process is against this rate, and the lowest percentage rate bid, wins. However, if there is a tie in the percentage rate then the person bidding the highest "premium" wins the bid. For instance if the lowest rate bid was 2% and then someone then bids 2% with a $1000 premium, this later and last bid would win. The premium is an amount to be paid to the town above the tax amount due. It is refundable by the town to the bidder/investor if the tax lien is redeemed within 5 years. (a premium is not refundable is paid as part of an assignment outside the auction process).
      5. Most bidding is now so competitive that 0% plus a premium is the most common bid.
      6. These 0% bids still make economic sense because a) the bidder then gets "priority" to purchase all subsequent tax liens on that property and b) the subsequent tax lien rate is guaranteed at 18%. These subsequent tax liens are referred to as "subs" and can be paid in two different ways a) by just paying them when they become due guaranteeing the 18% return b) by waiting to the next years tax auction and bidding on there to earn additional penalty interest which can be 2, 4 or 6% depending on the towns. This additional penalty applies only to the first year lien purchase and is a one time penalty. Many towns don't provide for this additional interest and Englewood is one that does not.
      7. No one at an auction bids against someone who has a "prior" because the prior owner of the tax lien has the RIGHT TO REDEEM and thus if you bid against a prior at an auction they can simply pay you the amount due and wipe out your lien keeping themselves in priority.
      8. If for some reason you get a tax lien and do not thereafter pay the subs or subsequent taxes coming due and someone else does get the lien then they take priority over you and if they go to foreclosure they can wipe you out BECAUSE IN NJ ALL PRIOR LIENS (WTH A FEW RARE EXCEPTIONS) ARE WIPED OUT ONCE A FINAL JUDGMENT ISSUES IN FORECLOSURE (including mortgages).
      9. Because Foreclosure wipes out prior liens, most mortgage holders will pay the taxes off prior to foreclosure to avoid loss of the mortgage.
      10. 98% of all tax liens are paid off in NJ prior to a Final Judgment in Foreclosure

    3. TAX SALE CERTIFICATE
      1. After the Bid is accepted then the Tax Collector's office will issue a Tax Sale Certificate. Once you have this document you should then file it in the County Clerk's Office.
      2. You must file this certificate in the county clerk's office to establish your lien. If not filed within 3 months there is a loss of priority.
      3. a.When taxes next become due on this property on which you hold a lien, you don't just send the money into the tax collector. You need to inform the tax collector that you are a tax lien holder on the property and the payment is made as a subsequent payment. The tax collector will then record the payment as such and issue you an Affidavit of Subsequent Tax Payment.

    4. THE ASSIGNMENT PROCESS
      1. Obtaining Tax liens by Assignment
        1. from current lien holders willing to sell
        2. from banks
        3. from institutional tax lien holder
        4. from towns who could not sell a property at auction "abandoned" or "orphan" properties (which you can foreclose upon in 6 months rather than 2 years)
        All of the foregoing may sell you their tax lien and often they are purchased along with a non-refundable premium.
      2. Assignment Methods: Section 112 of the Tax Sale Law - buy from the town at cost plus no reverter, Section 113 and 114 - buy at less than cost but need municipal approval, , Section 114.1, adds a provision if the property is not foreclosed in 2 years the lien reverts back to the town.
        3. When taking an assignment by tax lien is sure to get the proper paperwork - you need.

  2. FORECLOSURE
    1. By the Tax Lien Holder - who must wait 2 years before foreclosing:
      1. Foreclosure by the Tax Lien Holder is an In Personam Foreclosure and a Strict Foreclosure. This means that all of the defendants have to be personally served with a copy to the town.
      2. Before Foreclosure is commenced a 30 day letter should go out (certified mail RRR and regular mail) to all the defendants notifying them that a foreclosure action is to be commenced. If this letter is not sent out then the lien holder cannot get costs! The foreclosure action Complaint must be filed between 30 and 60 days after the letter goes out.
      3. Before filing the complaint it is required that a title search be done and hopefully the title company does not miss any lien or judgment holders.
      4. Before foreclosure make sure all the tax lien certificates that you are foreclosing on are filed in the county clerk's office.
      5. Before you file the complaint, if the mortgage is held by the FDIC you must get their consent. This consent is never withheld in practice.
      6. The complaint is filed in Trenton and then they send it back with a docket number.
      7. Once you have the docket number you can and must file the Lis Pendens for protection. Order a title Run Down to see if any new liens were place on the property prior to you getting file the Lis Pendens.
      8. Once you have the docket number you can have the process server (or sheriff) do personal service on the defendants (per court rules).
      9. Tax liens have priority over mortgages, judgments, condo liens, IRS income tax liens, mechanics liens and life estates. Tax liens do no have priority over administrative expenses of a decedent's estate, bankruptcy attorney fees, superfund clean up costs on commercial property or residential over six units
      10. ANSWERS: There are basically rare defenses to a tax foreclosure proceeding so answers are only filed in 10% of the cases. If an Answer is filed, then a Motion to Strike the Answer is then filed.
      11. Answers not filed in 35 days are out of time and the Plaintiff can then file a Motion for Default setting Time, Place and Amount of Redemption. This must be accompanied by an Affidavit of Non-Redemption signed by the tax collector which states that the taxes are unredeemed and that there are no unpaid taxes on the property.
      12. The Court then issues a Redemption Order, Order Setting Time which gives the tax lien holder 60 days to apply for Final Judgment.
      13. Final Judgment is then signed into effect by the Court and at 4pm that day the tax lien holder owns the property in STRICT foreclosure. There is no sheriff's sale unless there is an IRS tax lien.
    2. By the Municipality
      1. This is an In Rem procedure. They can just send notices out by mail - no personal service.
      2. It can begin 6 months after the date of auction and the property does not go in auction.
      3. Towns prefer to assign these liens rather than foreclose on them.
      4. The proceedings are usually over in a few months.

  3. REDEMPTION
    1. If you buy the property from the owner and then seek to redeem and thus take over the tax lien you must buy at Fair Market Value or the courts will not permit redemption
    2. The only parties who can redeem are the owner, heirs, the holder of any prior tax lien certificate, the mortgage holder and the occupant. (Judgment holders, condo lien and mechanic lien holders do not have a right to redeem). To redeem one must get from the redemption figure from the town tax collector (which amount includes recoverable costs and legal fees). The redeemer then pays the tax collector that amount and the tax collector then sends a Notice of Redemption to the tax lien holder to see if it is correct. If correct, the tax lien holder then must sign the back of the Tax Lien Certificate for cancellation and return it to the tax collector. Thereupon the tax collector then sends the money due the tax lien holder. If the tax collector does not then file a discharge of lien with the county the redeemer should do so.
    3. All towns required that if there is to be redemption by installment payments, then town counsel or other municipal governing body approval be required. Some towns require municipal approval on all redemptions.
    4. There are penalties on any tax lien holder who knowing receives more than their legal entitlement on a tax lien.
    5. Redemption fees include the principal amount, the interest, recording and search fees. If foreclosure proceedings had commenced then additional fees are due: $500 attorney fee, filing fees, cost of service of process and advertising.
    6. THE RIGHT TO REDEEM is cut off as of 4pm on the date of Final Judgment signed by the court. There is a window of three months where a party can motion to vacate the default judgment based on reasonable excuse and the courts are somewhat liberal in granting this right but it is not guaranteed. After the 3 months it is almost never granted and this is when the new owner can actually get title insurance.