From The Field: Tax Lien Deal Analysis

I not too long ago attended a tax New Jersey tax sale. There have been solely 5 properties within the sale down from 15 on the unique tax sale record. Final 12 months at this sale I got here away with one respectable lien. This 12 months I did not get something at this tax sale. So I made a decision to do a tax lien deal evaluation of a number of the liens on this sale to see if investing in New Jersey is getting too aggressive for traders to make a revenue.

I solely bid on one little utility lien and was outbid by a mile. I used to be bidding on a lien quantity that was near $350. I bid 18% after which the bidding went to 17% so I bid 16%, then it went proper to 0%, $100 premium, $200, $300, $400, $500, $600, and was received at $700 premium. Which means that the winner can pay the quantity of the lien and get no curiosity on the certificates quantity (though they’ll get a 2% penalty on that quantity) and so they’ll additionally pay the $700 premium and get no curiosity on that quantity. All for the possibility to pay any subsequent sewer quantities at 8%. What they may not have been conscious of is that this specific municipality shuts the water and sewer off when a home is vacant.

This specific lien is on a townhouse, which was vacant and had already had the water shut off. The successful bidder can be fortunate to have the ability to pay one other $350 and get 8% on that, however in actuality they’ve already paid $1050 that they’ll solely obtain about $7.00 on that (2% of $350) and in the event that they get to pay one other $350 at 8% and the lien redeems after a 12 months, they’ll accumulate $39 on an funding of 1400 for a ROI of two.8% over a 12 months. However if you take into consideration that this was a fund and so they needed to pay somebody to do the due diligence and go to the sale and bid, I am certain that they had extra into it than $39. To be truthful they did purchase 3 of the opposite bigger tax liens, which they paid a lot larger premiums for. However this lien was not a superb funding for what they paid for it.

Is Tax Lien Investing In New Jersey Useless?

So is making an attempt to put money into tax liens in New Jersey like beating a useless horse? That relies on how a lot cash you must make investments, what you are keen to spend and what your backside line is, in different phrases what’s the lowest rate of interest that you simply’re keen to just accept.

There have been 2 non-public funds at this sale and three traders. One of many non-public funds received 4 of the liens, together with the utility lien that was mentioned earlier and one of many traders got here away with the biggest tax lien within the sale (round $8,100) and he paid $20,000 premium to get it! I do know that this does not sound like a superb deal, and it wasn’t the most effective deal on the market, however it’s worthwhile.

Tax Lien Deal Evaluation

Taxes offered at this sale are for the earlier 12 months, however proper now there are present taxes due that may be paid by the investor as soon as the tax lien certificates is issued. The annual taxes on this specific property are round $6,700. The investor will get no curiosity on the $8,100 certificates quantity, however he’ll get a 4% penalty it for the reason that lien quantity is over $5000. He’ll get no curiosity on the premium. He’ll get to pay the present 12 months’s taxes of $6,700 and make 18% on that. Then if he does nothing extra and the lien redeems after one 12 months, he’ll make $860 revenue (4% of 8100 + 18% of 6700) on a complete funding of 34,800, for a ROI of two.5%. Not excellent in any respect!

However that wasn’t probably the most that was paid for a tax lien at this sale. Probably the most premium paid for a lien at this sale was $32,000 for a $4,500 lien. So how may that be any higher than paying 20,000 for a $8,100 lien? The annual taxes on this parcel are $10,300. That is vital as a result of this municipality does have a year-end penalty. The year-end penalty is one other 6% penalty that’s added to the next tax quantity paid (along with the 18% every year already assessed to the tax payer) on the finish of the 12 months if the next tax quantity paid is over $10,000. So on this case the investor may get 24% on the $10,300 present taxes in the event that they get to carry the lien via the top of the 12 months and pay all of the sub taxes. If the lien would not redeem till for a full 12 months the investor may make $2652 (4% of 4500 + 24% of 10300) on an funding of 36,600 for an ROI of seven.2%. This was a greater deal, however not probably the most worthwhile deal of the sale.

Probably the most worthwhile deal (bid by the identical fund) was a $2000 lien for which they bid $8,000 in premium and the annual taxes are near $7,000. If the lien will not be redeemed till subsequent 12 months and so they pay the present taxes, they’ll make round $1300 revenue on a complete funding of $17,000 which is a ROI of seven.6 %. It’s worthwhile to pay premium for tax liens which are over $1500, you simply want some fairly deep pockets with the intention to it!

Be aware: The precise numbers from the tax sale had been rounded off to entire numbers that made the calculations for our functions simpler to do and it simpler to exhibit easy methods to analyze a tax lien investing deal at a New Jersey tax sale.