By Anthony J. D’Artiglio and Jonathan D. Sherman
New Jersey real estate owners who fail or neglect to pay their property taxes face the potential loss of their homes and the forfeiture of any equity they’ve built. But the financial fallout of unpaid property taxes also offers private investors a potentially lucrative opportunity to benefit from the owner’s default. Property tax debts become liens held by the township or other taxing authority, and those lienholders are required to regularly sell their rights to individuals or entities rather than shouldering the burden of maintaining, owning, or selling the properties.
Purchasing and foreclosing on tax liens in New Jersey is a unique and nuanced avenue for investing in residential or commercial real estate. While the process can present a purchaser with significant upsides, tax lien purchasing requires a solid understanding of local laws, procedures, and risks in order to protect and maximize the return on investment.
What Is a Tax Lien and What Rights Does a Lienholder Acquire?
A tax lien is a legal claim placed by a government taxing entity on real estate due to unpaid property taxes. Once it imposes the lien, the municipality or township has the authority to sell a tax lien certificate to collect the delinquent amounts. The investor who buys the lien effectively pays the taxes on behalf of the property owner, in exchange for the right to collect the debt with interest and penalties. If the homeowner doesn’t pay the past due amounts plus up to potentially 18% interest (referred to as redeeming the lien), the lien purchaser can elect to foreclose and seek to take full ownership of the property.
Lien Sale and Purchase Process
Each taxing municipality in New Jersey conducts an annual (or more frequent) tax lien sale for delinquent, unredeemed properties in its jurisdiction. The process is governed by the New Jersey Tax Sale Law, which establishes specific procedures and timelines and outlines the respective rights of the property owner and lienholder.
Here’s how the process typically proceeds:
- Delinquency and Public Notice: When a property owner fails to pay property taxes, the tax collector in the municipality compiles a list of delinquent properties and prepares for a tax sale. By law, the city must publish a notice in a local newspaper and post the list publicly. The notice must run at least four weeks prior to the sale.
- Auction: New Jersey uses a “bid-down interest” system. The interest rate on tax liens is capped at 18%, but investors compete by bidding down the interest rate they are willing to accept. Bidding may go as low as 0%, in which case investors may bid a premium (additional money paid upfront) to win the lien. The lowest interest rate (or highest premium) wins the lien.
- Issuance of the Tax Sale Certificate: At the conclusion of the sale, the prevailing winning bidder pays the lien amount to the municipality and receives a Tax Sale Certificate (TSC). This certificate gives the holder the legal right to collect the debt from the property owner, including interest and penalties. The purchaser must then record the TSC with the appropriate county clerk within 90 days.
Hurry Up and Wait
During the first two years after purchasing a tax lien, the holder cannot move forward with foreclosure proceedings and take ownership of the property even if the outstanding amounts remain unpaid (though there is an accelerated timeline for strictly defined “abandoned” properties). That is because the law gives the property owner that same length of time (called the redemption period) within which it can pay the full amount owed, including interest and any other costs incurred by the lienholder, such as attorneys’ fees, title searches, and recording fees. During this time, the holder should continue to pay real estate taxes as they come due and owing to avoid a subsequent tax lien destroying their priority. Any additional taxes paid by the holder can be recovered from the property owner as part of redemption.
Even after the redemption period concludes and foreclosure proceedings begin, the property owner can still pay off all delinquencies and extinguish the lien at any time prior to the entry of a judgment of foreclosure or sale of the property at auction.
Foreclosing on the Right of Redemption
Once the two-year redemption period expires, the lienholder can begin foreclosure proceedings to obtain the deed to the property.
The foreclosure process begins with a title search to identify all parties with an interest in the property. This includes the owner, mortgage holders, and any other lienholders. The lienholder then files a foreclosure complaint in the Chancery Division of the Superior Court, naming and serving the complaint on all parties with an interest in the property. If no one redeems or contests the foreclosure, the court will issue a Final Judgment, extinguishing the right of redemption and granting ownership to the certificate holder. The investor must then prepare and record a deed in foreclosure, transferring title to themselves. If the property is occupied, the former lienholder/now owner may need to start a separate eviction proceeding to gain possession.
2024 Law Gives Property Owners the Right To Reclaim Equity
Historically, municipalities that foreclosed on a tax lien and sold a property retained its equity beyond the outstanding amounts owed. Similarly, one of the most attractive aspects of tax lien investing was the ability to acquire all of a property’s equity for a fraction of its total value. According to the New York Times, over $115 million in equity was acquired from New Jersey homeowners through tax sale foreclosures between 2014 and 2021.
However, in its 2023 decision in Tyler v. Hennepin County, the United States Supreme Court ruled that a Minnesota law allowing a county to retain surplus proceeds from a tax sale above the amount of unpaid taxes and fees was unconstitutional as a violation of the Fifth Amendment’s takings clause.
To conform New Jersey law to the Tyler decision, the state enacted a law in July 2024 that allows homeowners to reclaim excess equity by requesting their property be sold at a judicial sale or online auction if they make such a request before the entry of a final judgment of foreclosure. Once the property is sold and all debts and costs are paid, the homeowner will receive their remaining equity.
Even with these changes, tax lien purchases can still offer investors a solid return on investment if the homeowner redeems the lien at a favorable interest rate. Furthermore, the holder can “credit bid” their lien amount to obtain the property at the foreclosure auction.
If you are considering investing in tax lien purchases in New Jersey, please contact one of Ansell. Law’s experienced New Jersey real estate attorneys to discuss your questions, concerns, and options.
