I recently attended a tax New Jersey tax sale. There were only 5 properties in the sale down from 15 on the original tax sale list. Last year at this sale I came away with one decent lien. This year I didn't get anything at this tax sale. So I decided to do a tax lien deal analysis of some of the liens in this sale to see if investing in New Jersey is getting too competitive for investors to make a profit.

I only bid on one little utility lien and was outbid by a mile. I was bidding on a lien amount that was close to $350. I bid 18% and then the bidding went to 17% so I bid 16%, then it went right to 0%, $100 premium, $200, $300, $400, $500, $600, and was won at $700 premium. This means that the winner will pay the amount of the lien and get no interest on the certificate amount (although they will get a 2% penalty on that amount) and they'll also pay the $700 premium and get no interest on that amount. All for the chance to pay any subsequent sewer amounts at 8%. What they might not have been aware of is that this particular municipality shuts the water and sewer off when a house is vacant.

This particular lien is on a townhouse, which was vacant and had already had the water shut off. The winning bidder will be lucky to be able to pay another $350 and get 8% on that, but in reality they have already paid $1050 that they will only receive about $7.00 on that (2% of $350) and if they get to pay another $350 at 8% and the lien redeems after a year, they will collect $39 on an investment of 1400 for a ROI of 2.8% over a year. But when you take into account that this was a fund and they had to pay someone to do the due diligence and go to the sale and bid, I'm sure they had more into it than $39. To be fair they did buy 3 of the other larger tax liens, which they paid much bigger premiums for. But this lien was not a good investment for what they paid for it.

Is Tax Lien Investing In New Jersey Dead?

So is trying to invest in tax liens in New Jersey like beating a dead horse? That depends on how much money you have to invest, what you're willing to spend and what your bottom line is, in other words what is the lowest interest rate that you're willing to accept.

There were 2 private funds at this sale and 3 investors. One of the private funds got 4 of the liens, including the utility lien that was discussed earlier and one of the investors came away with the largest tax lien in the sale (around $8,100) and he paid $20,000 premium to get it! I know that this doesn't sound like a good deal, and it wasn't the best deal out there, but it is profitable.

Tax Lien Deal Analysis

Taxes sold at this sale are for the previous year, but right now there are current taxes due that can be paid by the investor once the tax lien certificate is issued. The annual taxes on this particular property are around $6,700. The investor will get no interest on the $8,100 certificate amount, but he will get a 4% penalty it since the lien amount is over $5000. He'll get no interest on the premium. He'll get to pay the current year's taxes of $6,700 and make 18% on that. Then if he does nothing more and the lien redeems after one year, he'll make $860 profit (4% of 8100 + 18% of 6700) on a total investment of 34,800, for a ROI of 2.5%. Not very good at all!

But that wasn't the most that was paid for a tax lien at this sale. The most premium paid for a lien at this sale was $32,000 for a $4,500 lien. So how could that be any better than paying 20,000 for a $8,100 lien? The annual taxes on this parcel are $10,300. This is significant because this municipality does have a year-end penalty. The year-end penalty is another 6% penalty that is added to the subsequent tax amount paid (in addition to the 18% per annum already assessed to the tax payer) at the end of the year if the subsequent tax amount paid is over $10,000. So in this case the investor could get 24% on the $10,300 current taxes if they get to hold the lien through the end of the year and pay all the sub taxes. If the lien doesn't redeem until for a full year the investor could make $2652 (4% of 4500 + 24% of 10300) on an investment of 36,600 for an ROI of 7.2%. This was a better deal, but not the most profitable deal of the sale.

The most profitable deal (bid by the same fund) was a $2000 lien for which they bid $8,000 in premium and the annual taxes are close to $7,000. If the lien is not redeemed until next year and they pay the current taxes, they will make around $1300 profit on a total investment of $17,000 which is a ROI of 7.6 %. It is profitable to pay premium for tax liens that are over $1500, you just need some pretty deep pockets in order to it!

Note: The actual numbers from the tax sale were rounded off to whole numbers that made the calculations for our purposes easier to do and it easier to demonstrate how to analyze a tax lien investing deal at a New Jersey tax sale.