Just Went to NJ Tax Lien Sale.. Not Worth It?

[Mike Kalob]

So I went to my first ever NJ Tax Lien Sale couple of weeks back...

ALL of the properties sold at pretty insane premiums.. please see below - tax lien amount on left, premium bid on right..

Tax Lien..............Winning Premium Bid
$2,818.55............$14,600
$14,224.22...........$28,110
$5,382.15............$15,200
$3,221.28............$17,200

etc....etc...etc (These homes were in the $200k-350k range)

What gives?

There were about 5-6 "pros" doing all the bidding while the rest watched..

As pros, I assume they already know that 97% of taxes are paid back, and it's very RARE for an actual foreclosure to take place, so I know they're not trying to bid on the property in hopes of getting the actual home..

That said one can assume, they're trying to earn interest, by paying a huge premium?

I understand a small premium, since one can avail of NJ's 4-6% penalty, and subsequent taxes receive the higher rate...

But since the premiums are well above annual tax rates, and there is a small 2 year waiting period for foreclosing, PLUS it's most likely the mortgage company or home owner will pay off the taxes (so no home gained), I don't see the reasoning for paying such high premiums, given that any "gain" on subsequent taxes would have to fall OUTSIDE the 2 year waiting period due to the high premium amount, but homeowner or mortgage company would most likely have paid off by then.

PS this was in a more "rural" area of NJ, as I avoided the congested counties since I heard it was even worse there (in terms of higher winning premiums).

[Frank Schlesinger]

NJ tax liens pay 18% on liens over $1500. Auction starts at 18% and interest rate can be bid down to zero then premium bidding begins. Bidding down interest rate plus a premium is paid for control of the lien. If the rate is bid down to zero, lien holder receives 0% the first year, town holds the premium, and the next year investor receives the full 18%. In addition depending upon municipality investor may receive up to an additional 6% depending upon lien amount.

After two years the investor has the option to foreclosure on the property and up to five years to foreclose.

What happens to the premium? If the lien is redeemed, the investor receives their premium back plus any interest and penalty earned on the lien. Premiums do not earn interest. If the investor forecloses, they lose their premium but get ownership of the property free and clear.