WHAT IS A TAX CERTIFICATE?

A Tax Lien Certificate is an encumbrance on real estate, placed by a taxing authority and sold to investors who bid at an absolute auction!

Unredeemed Tax Lien Certificates give the holder the right to foreclose and stand before the first mortgage.

In New Jersey, there are over 460 Municipal Taxing Agencies. These agencies auction unpaid property tax obligations at advertised auctions and issue Tax Lien Certificates that are government guaranteed instruments yielding as much as 24%!

When taxes are delinquent for a prescribed period of time, the municipality is required to hold a tax sale. The Tax Collector is charged with the duty of conducting such sales. The collector must post notices for the sale and advertise the sale.

The State sets the maximum interest rate (18%). The interest rate can increase over 18% and/or the interest rate bid, when the dollar amount of taxes paid is over the specific thresholds.

The auction begins by an investor bidding the maximum interest rate. Investors bid against each other by lowering the interest rate. The lowest interest rate bidder obtains the Tax Lien Certificate for the property. The winning bidder/investor pays the tax collector the amount of the delinquent tax with certified check or cash. The tax collector issues a tax certificate to the successful bidder. The bidder registers their certificate at the County Hall of Records as a bona fide lien.

Private citizens, companies, investment clubs and municipalities can purchase Tax Lien Certificates.

All Tax Lien Certificates can be redeemed prior to foreclosure. The certificate is redeemed when the taxes, interest and all costs are paid. The interest and principal is paid to the investor by the municipality when the owner pays the taxes or if property ownership is transferred.

If the delinquent taxpayer or other parties, do not pay the delinquent taxes plus the interest within the prescribed time period, the investor /bidder can foreclose on the property.

A lien for unpaid taxes creates a defect of the title of the real estate in question.

FORECLOSURE ON A TAX CERTIFICATE

The owner of the Tax Lien Certificate may obtain clear title to the property only if the Tax Lien Certificate remains unredeemed. This means, the holder may obtain clear title to the property when back taxes and interest are not paid within the prescribed time period after the certificate was issued and the certificate holder executes a judicial foreclosure. The prescribed time period to hold the certificate before foreclosure depends who purchases the certificate as explained below.

TAX CERTIFICATE MATURITY-PRESCRIBED TIME PERIOD BEFORE FORECLOSURE

If private parties own the Tax Lien Certificate, they must wait 18 months after issuance of the certificate before foreclosure is permitted. However, there are circumstances where foreclosure can begin as soon as 6 months after the certificate issuance. When there are no other bidders on the tax sale certificate, the municipality (strike off) "owns" the certificate. The Municipality can foreclose on these certificates after 6 months. The municipality can also sell these certificates to an individual and the individual can also foreclose after 6 months. In recent years, many municipalities have sold their entire group of certificates to large investors. The certificates included in the group sale can also be foreclosed after 6 months.

The Tax Lien Certificate holder must exercise his right to foreclose within 20 years.

In New Jersey, the holder of the Tax Lien Certificate simply applies for (judicial foreclosure) and receives a deed to the property. Since Tax Lien Certificate foreclosures are Judicial, there is no public auction. There are no other bidders. Papers are filed and the judge executes the action by signature. You must hire a competent attorney and accountant, experienced in these fields.

PRIORITY OF TAX LIEN CERTIFICATES

The tax lien stands before the first mortgage. Generally, only senior liens (recorded before the tax lien date) from the Federal or State Government and subsequently issued tax certificates stand before the Tax Lien Certificate. All previous mortgages and liens are junior and are wiped out. However, there are some exceptions, and one should consult a qualified attorney prior to purchasing a tax sale certificate with special liens.

A PROFITABLE EXAMPLE

Tax Lien Certificates give you the excitement of gambling with little chance of loosing.

Recently, a $12,000.00 Tax Lien Certificate sold for 18% in New Jersey. The bidder also purchased the current tax year, in advance, for an additional $10,000.00. As prescribed by law, the certificate holder charges an additional 6% in penalties (because of the large dollar amount). The property was an old 64-unit motel that had not done business for several years. The delinquent property owner had applied and was approved to convert the existing units to apartments. The certificate holder foreclosed and subsequently sold the upgraded property for over $750,000.00.

This is not a game for the anxious. Patience is paramount.