Real Estate

What is the premium for tax lien certificates?

The premium is an additional amount to the amount of the tax lien certificate that the investor will pay to the municipality to acquire the lien. When a premium is paid for a link, it is not the lowest interest rate that is bid that wins the link, but the highest premium. Premium is not offered in all states that sell links. In some states, the interest rate is lowered and the bond is sold to the investor who offers the lowest interest rate. In other states, the interest rate is held constant while the bond premium is bidding, which reduces the yield of the bond (since in most states no interest is paid on the premium).

Each state has its own rules regarding bidding and whether or not the premium is bid. New Jersey is unusual in that the interest rate is lowered and once the interest is lowered to 0%, the premium is offered. This means that the investor does not receive any interest on the amount of the certificate or the premium, which significantly reduces the returns on this investment. The only interest you get in this case is the interest paid on subsequent taxes, which in New Jersey is 18% for lien amounts over $ 1,500.00.

In New Jersey, the municipality has premiums and if the lien is not redeemed within a 5-year period, that money is not returned to the investor. Of course, the investor can start a foreclosure process after 2 years, but if the property is foreclosed, the investor does not get his or her premium back. He can get the property, but the premium will be forfeited and will be considered part of the cost of the property. The rules about when and if the premium is paid to the investor and whether or not interest is paid on the premium offering are different for each state.

Why did this happened?

In almost every tax lien sales I attend, there is a local investor, new to tax lien investing, who is confused and wants to know what’s going on. Why would someone want to buy a lien, pay more than the lien amount, and get no interest on their initial investment? They assume that investors do this in hopes of being able to foreclose on the property.

The real reason investors in tax lien pay a premium is that once you are the lien holder, you have the ability to pay subsequent taxes. In New Jersey, you can earn between 8% and 18% in subsequent taxes, depending on how much is owed. For amounts owed over $ 1500.00, the interest rate is 18%, for any amount less than $ 1500.00, the interest rate is 8%. Also, as long as the lien is redeemed after the certificate is issued, even if you have not obtained the certificate amount at an interest rate, there is an additional surrender penalty that is paid to the lien holder. The exchange penalty in New Jersey is 2% for certificate amounts of $ 200.00 – $ 4,999.99, 4% for certificate amounts of $ 5,000.00 – 9,999.99, and 6% for certificate amounts of $ 10,000.00 or more. The owner must pay this penalty when he redeems the lien and it is only calculated on the amount of the certificate, not on the subsequent taxes that the lien holder has paid. Each state also has different penalties that can be applied in addition to the amount of interest on the link.

On top of all of this, some New Jersey municipalities have an additional year-end penalty for back taxes in excess of $ 10,000. A 6% penalty is added for amounts owed over $ 10,000.00 at the end of the year. This penalty only applies to subsequent taxes. Therefore, if you are the lien holder and have paid more than 10,000.00 in subsequent taxes, at the end of the year the owner will have to refund you 24%, in case the lien is refunded, in addition, you will receive the penalty for redemption . in the amount of the certificate of your link.

A simplified example

Let’s look at a somewhat simplified example: Let’s say you go to a sale and buy and a $ 5,000 lien on a property with annual taxes of $ 10,000.00 (not unusual in some New Jersey municipalities) and you offer a premium of $ 10,000. You pay the municipality $ 15,000.00 (amount + premium link) on the day of the sale. The sale will take place on December 1 and last year’s delinquent taxes are being sold. On December 11, pay current year’s taxes of $ 10,000.00. And let’s say the lien is redeemed on December 11 of the following year and you paid no further taxes later.

To redeem the link, the property owner must pay the certificate amount plus the exchange penalty and the subsequent tax amount at 24%. That’s $ 5,000 (link amount) + $ 200 (4% redemption penalty) + $ 10,000.00 (subsequent taxes) + $ 2400.00 (24% subscriptions) = $ 17,600. The municipality must return your premium of $ 10,000.00. Raises $ 27,600.00. His initial investment was 25,000.00. You have a total profit of $ 2,600.00 for a 10.4% return. This is a simplified example. Your actual return will be slightly higher if you continue to pay subsequent taxes until the lien is redeemed.

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