Maybe you have seen the ads on TV promising that you can get rich off purchasing tax liens, or that feature people talking about how they purchased houses free and clear for $1,000 (or some other low number). Yes, many of these ads are scams, or at least, do not deliver what is promised. However, there is some truth to the benefit of purchasing tax liens, and the ability of someone to make a profit dealing in them.
What are Tax Liens?
Tax liens are liens put on by a municipality for unpaid real estate property taxes. Governments need money to operate, they are not in the collection business, and they can not wait forever for their money. So to raise quick cash, they sell the liens to citizens.
Citizens who purchase and record the liens in their name, then have the right to be paid on them at a healthy interest rate of up to 18%. If the taxes (and interest) are not paid to the person who purchased the lien, the person holding the lien can then foreclose.
The downside to being a lienholder is that you need to wait at least two years before you can foreclose.
Foreclosing on Liens
Assuming the property owner does not pay you for the lien, you can then foreclose on it. You will likely need to hire an attorney to handle the foreclosure for you. The upside is that if your case is successful, you will likely own the property free and clear of any other liens—that is, you will just have taken ownership of property for the cost of the lien you initially paid for and the costs and fees associated with the foreclosure case.
Remember that the homeowner always has a right of redemption, which means that right up until the sale of the property by foreclosure, the homeowner can pay you everything owed to you, and stop the foreclosure and keep the property.
The real benefit of foreclosing on tax liens is that they are superior to most all other kinds of liens. So, for example, even if someone has an outstanding mortgage, the foreclosure pursuant to your tax lien extinguishes the mortgage, and the same goes for most other liens, such as, for example, contractor liens or homeowners association liens. This is assuming that all lienholders are named and served with the foreclosure suit.
Risks in Tax Liens
Dealing in tax liens is not risk free. Some liens are not extinguished by a tax lien foreclosure. That means that you will have to pay them, if you want to be the legal owner of the property after foreclosing.
In some cases, if you do foreclose and come to own the property, you may be purchasing property with code violations, or which is in need of costly maintenance. In some cases, property owners may challenge the tax foreclosure procedure, and make your foreclosure case a lengthy contested matter.
Still, purchasing tax deeds can be a healthy investment, and a good way to get into purchasing property.
Make sure you understand how property taxes affect your real estate. Contact real estate attorney Agnes Rybar LLC, to make sure you have representation in any New Jersey real estate transaction.
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