Last week I went to a tax sale in New Jersey. I really don’t attend to many tax sale anymore for 2 reasons, one is that I do half of my investing in a tax lien investing fund, with money from my self-directed IRA. The other reason that I don’t have to go to many tax sales these days is that I continue to pay subsequent taxes on the liens that I have acquired over the last few years.

Even though the redemption period is only 2 years in New Jersey, the lien does not expire for 20 years. So if you have a good lien, that you know will eventually pay off, you can continue to pay the subsequent taxes and get the maximum rate on your these payments, which is 18%. There’s only one problem, for the smaller liens that are less than $1500, you only get 8% on the subsequent tax payments until the total delinquent amount is $1500.

So if I buy a utility lien for let’s say $500 and I get 18% on my lien and then I pay the next 2 years of subsequent utilities ($500 each year), I only get 8% on the next $1000 that I pay in. But if I don’t pay the subsequent taxes and instead go to the tax sale and bid on them, I can possibly get another tax lien certificate at a higher rate. Some tax collectors will still let you indicate if you are a prior lien-holder when you bid. Most investors know that it is useless to bid on a lien if there is a prior lien holder bidding on it. This is because even if you win the bid, the prior lien holder can redeem you. If the prior lien holder is at the sale, they are like to redeem the lien right after the tax sale, and if they do that you won’t make any interest on your money.

Anyway, I went to this tax sale because I had prior liens on properties that were in the tax sale. The liens I had were all small and wanted to try and get 18% not the 8% that I would get if I had paid the subsequent taxes and kept the properties out of the tax sale. These were the only properties that I bid on and there were 3 of them in all. I got the first 2 at 18%, but on the third one a new investor started bidding me down. Instead of continuing to bid, I stopped bidding and let him have the lien. Right after the tax sale I let the tax collector know that I wanted to redeem the lien. She gave me the redemption amount the following week and I sent her the check, now I’ll make only 8% on my subsequent taxes for that lien, but 18% on the other 2.

Looking back I could have continued to bid down to the 8% that I would have gotten anyway. But I guess I just wanted to teach this bidder the lesson that no matter what interest rate you think your getting, it doesn’t make sense to bid against the prior lien holder.? Many tax collectors in New Jersey don’t you let you indicate that you have a prior lien on a property. I always find this out before the tax sale, and if that were the case I would have paid the taxes and kept the properties out of the tax sale. But as it happened I was able to get the maximum rate on 2 of the liens, so it worked out fairly well.

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