NJ Tax Lien Questions

Jersey City, New Jersey
Tax Liens & Mortgage Notes
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NJ Tax Lien Questions

Hanming Zeng
Member since 2020 · 1 post · 1 vote

Hi folks,

I am new to NJ tax lien investing. I found a lot of tax liens sales are conducted online in NJ through realauction.com - I was able to see the bidding results in the past. To my surprise, a lot of the winning bids exceed way way way more than the face value, which I don't quite exactly understand. One example I saw was a lien was put on a house with a face amount of about $600, the winning bid is more than $20,000! The house is valued at about $400,000 according to zillow. Here are my confusions:

1. why are people willing to bid so much over the face amount? I understand if they think they are likely to have this property foreclosed so they can snatch the title in 2 years. But given about the fact that 95% the liens get reedeemed, wouldn't it better off to invest the $20,000 somewhere else in the 2 year period?

2. I understand that the winner can opt to pay subsequent taxes, which they will earn 18% interest rate. Assuming $8000 annual tax bill on the above example, and the lien holder opts to pay for 2 years, which is $16,000. On 18% rate, the earnings are $2,880. Assuming redemption, the investment would have been $20,000 (bid amount) + $16,000 (2 years of subs) = $36,000 - the total return is about 8% (annualized to 4%) - which does not seem like a great investment to me

Can someone help me understand this?

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    3y

    @Hanming Zeng it is normal for properties to sell for above the face value. Despite what Gurus tell you, tax sale is very competitive and properties sometimes sell for top dollar.  I am surprised that something with a value of $400k sell for as low as $20k. That wouldn't haqe sold so low in Maryland. 

    Let's see, If you could buy a house for $20k and resell it for $400k but it only happend 1 in 20 times, all the other times you just got your money back, wouldn't that be worth doing? Yes it would   .   .   . possibly. It is not that simple but some investors are willing to work on small margins. Often these bids are by people who don't understand the hidden costs and the tremendous risks. 

    Tax sale has become so papularm the returns have been driven dow to where it often does not make economic sense.  There is a LOT of stupid money being thrown at tax sale right now. 

    2Reply
  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    3y

    You are correct that many bids don't make any sense at all.  Plenty of reasons for this.

    At almost every auction I attend, and that is one or two a month, there is somone new bidding on something they obviously don't have a clue about.  We try to warn them....hey that's a partial interest, or that land is under water, or there are no utilities and won't be any, that lot is too small to build on, the city won't approve any construction there, and on and on and on.   However they continue to bid and sometimes bid way way high against themselves.

    I think you have to be careful with ARVs too.   Rarely have I seen a move in ready beautiful home at a tax auction.  Maybe 1 in 1000 properties.  I always say if they're not paying taxes, there's probably a lot of other things they aren't paying.  Normally in my area the properties will need a lot more work than even a normal rehab.  Now if you can get a true $400,000 property for $20,000 you should be able to fix just about anything and make a profit.   However I would think this is the exception, not the rule.

    As with Ned's example if you're tying up that much money for such a long time period hoping to get lucky, that doesn't sound like a good business model. Sure you make outsized profits on that one home, but you spend a lot of time, energy, money, lost opportunity along the way.

    Keep studying, maybe you can find some gems and exceptions.

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