NJ Law Journal Article: Real Estate Settlements Face Disruption A buyer must be a party to the foreclosure to redeem the tax lien or risk losing title
By Robert W. Keyser
How does New Jersey assess taxes?
New Jersey assesses taxes on the local (municipal) level. We have 566 municipalities, each of which has its own tax sale. Most auctions are in person, call out. Now about 10-20 or so are on line.
What is the risk of purchasing a Tax Sale Certificate in New Jersey?
Purchasers of tax sale certificates in New Jersey buy at their own risk. In the present case the Appellate Division said: "In these transactions caveat emptor should be the rule."
How does the bidding process work?
If in person – bid the interest rate, starting at 18%. The interest rate is bid downward. After 0%, then premiums are bid. Premiums are held by the municipality for five years. If you are redeemed in that period (which may be extended by a bankruptcy filing), you get the premium back, without interest. If you are not redeemed in that time frame, or you take title to the property by foreclosure, the premium is released (“escheats”) to the municipality.
If Online, the bidding procedure is the same, but may be proxy or non-proxy bids – read the rules.
Basic Inquiry – What should you do?
- What type of property - residential, commercial, industrial, vacant, tax exempt?
- What are your lender’s limitations, or parameters?
- What are the risks you are trying to avoid: unbuildable lots, crack houses, meth labs, environmentally challenged, wetlands, burnouts, demolished properties.
- Types or methods of inquiry: on line searches, drive by, DEP known site website. How much money do you spend on research for a lien you may not obtain?
What is “abandoned?”
Except as provided in section 6 of P.L. 2003, c. 210 (C. 55:19-83), any property that has not been legally occupied for a period of six months and which meets any one of the following additional criteria may be deemed to be abandoned property upon a determination by the public officer that:
- The property is in need of rehabilitation in the reasonable judgment of the public officer, and no rehabilitation has taken place during that six-month period;
- Construction was initiated on the property and was discontinued prior to completion, leaving the building unsuitable for occupancy, and no construction has taken place for at least six months as of the date of a determination by the public officer pursuant to this section;
- At least one installment of property tax remains unpaid and delinquent on that property in accordance with chapter 4 of Title 54 of the Revised Statutes as of the date of a determination by the public officer pursuant to this section; or
- The property has been determined to be a nuisance by the public officer in accordance with section 5 of P.L. 2003, c. 210 (C. 55:19-82).
What if I have a lien on an abandoned property?
When you have a lien on an abandoned property, foreclose immediately – you may be permitted entry for repairs. Avoid the risk of further deterioration
Note: there are statutes forcing lenders to register and to be liable for care of abandoned properties. Although many municipalities do not understand, these statutes and ordinances do not apply to the holders of tax liens.
What about subsequent taxes that come due after I buy the certificate?
In New Jersey, you can pay subsequent taxes in each quarter that the owner does not, and add the amount paid as principal to your lien, earning 18% above $1500 (lien amount plus subsequent taxes), regardless of the interest rate on the certificate. If you don’t, you allow a lien senior in priority to your lien to be sold. But, inspect again before paying subsequent taxes (no use throwing away good money after bad.)
REMEMBER - Purchasers of tax sale certificates in New Jersey buy at their own risk. In the present case the Appellate Division said: "In these transactions caveat emptor should be the rule."
Now I own the tax sale certificate. What next? The Foreclosure Process.
(This is generally handled by your attorney. It can be complicated, and will create a problem if it is not handled correctly.)
A. When do you start? Not before two years from the date of issuance (unless you have a certificate on an abandoned property – see above), but there may be strategic reasons why you may wait beyond that date? Many lien holders want to start on the first permissible day. If you have borrowed money against your certificates, your lender may have parameters as to when you must start foreclosure.
B. The Foreclosure Process in a nutshell:
- Pre-foreclosure notice to owners, mortgagees, holders of older tax liens.
- Thirty-three days later, file your complaint. In NJ, all foreclosures are filed centrally in the Foreclosure Section of the Superior Court. They are listed as being in the County where the property is located. Name everyone who has an interest in the property – owners, mortgagees, other junior tax liens, judgments, condo liens. Everyone who has an interest of record that is junior in priority to your tax lien. That means everyone except senior (newer) tax liens, and NJ Spill Act liens (bad).
- Serve your filed complaint on everyone you can find and start due diligence on everyone you can’t find. Personal service can be difficult, but is always best. There are a number of alternate ways to serve, but you must demonstrate to the Court why you had to use an alternate form of service. DUE PROCESS IS THE KEY.
- File your lis pendens, and search to the lis pendens filing to see if you have to amend your complaint.
- Simultaneously prepare and file with the tax collector your Affidavit of Fees and Costs. This amount, which is updated with the collector, generally in connection with a redemption inquiry, is recovered as part of redemption sums. It is sharply limited by Court Rule.
- Thirty-five (35) days after service, you can default a defendant. You may have to deal with answers, some of which may be deemed to be “contesting”. Those answers are dealt with by the local judge in the County. With almost no exception, we get rid of them after some brief litigation.
- (The following applies if the USA is not a defendant, which is most of the time). File the appropriate pleadings to get an Order Setting Time, Place and Amount for Redemption (“OST”). That order sets a redemption deadline of about 45 days from the date of entry. The amount in the Order is not the redemption amount, which increases every day, and is obtained from the tax collector. That Order also includes an Order for Fees and Costs, which must be satisfied on redemption.
- The OST is served on all defendants, but not all defendants may redeem the lien. Only owners, mortgage holders, holders of junior (older) tax sale certificates, and “parties in lawful possession” (generally bona fide tenants, but they rarely redeem). Judgment holders and other lien interests may not redeem.
- Once the time for redemption has expired, you obtain from the tax collector an Affidavit of Non-Redemption, where the collector certifies that the lien has not redeemed. You will also have the collector certify that all taxes have been paid to the date of the filing of the Complaint.
- The Affidavit of Non-Redemption and a Final Judgment is submitted to the Court, either by application or Motion. When entered, the property is owned by the Plaintiff. You serve the Judgment on all defendants, and record it in the real estate records. It is your deed to the property.
- If the USA (generally the IRS) has a lien, an alternate procedure must be followed. There is no OST issued. Rather, instead of the OST, we apply for Final Judgment, submitting it to the Court with a Writ of Execution. That Final Judgment and Writ provides for a Sheriff’s Sale of the property, as if you were foreclosing on a mortgage. You do have priority over IRS liens.
- One other note: Many lien holders take title to certificates in the name of a custodian or trustee. Most of these relationships (all of the ones with which I am familiar) require that final judgment not be entered in the name of the custodian. You may have an REO holding entity to take title to properties. Therefore, before the judgment package is submitted, a motion and order changing the name of the Plaintiff will have to be filed and served. The Assignment out of the custodian, which must be recorded, is submitted to the court with that motion.
Now you own the property. What are your options for taking possession?
You have a number of alternatives, depending upon the nature of the occupant.
- A former owner or someone who claims the right to be on the property through a former owner (family member) can be evicted by use of a Writ of Possession. This is issue by the Court, and results from the fact that your Final Judgment includes a judgment for possession. As you can imagine, this process can be unpleasant. To the extent possible, try to establish communication with the occupant. An orderly move-out, which might involve some cash contribution, without the use of the Sheriff’s department.
- Bona Fide Tenants. These may be thorny issues, including whether or not you have a bona fide tenant. New Jersey affords real residential (not commercial) tenants with substantial protection, starting with the fact that the Final Judgment does not cut off the right of the tenant under a lease (written or oral). We call this the Anti-Eviction Act. You will have to deal with a party who has the right to stay, subject to certain terms, including the payment of rent. If you need to get that tenant out, you will need to go to Landlord Tenant Court, or file for Ejectment proceedings in very difficult situations.
CAN I SELL THE REAL ESTATE?
- There are issues that arise in the sale of “real estate owned” (called “REO” in the industry) acquired by tax foreclosure. Apart from the decisions to sell “as is” (typical, in my experience) or agree to make some improvements, you have municipalities with varied requirements for “Certificates of Occupancy”, the possibility of underground storage tanks and other environmental issues, and State laws impacting upon wells and septic systems in the more rural sections of the State. All rights and responsibilities of the parties should be clearly delineated in a Contract of Sale.
- The availability of title insurance can be problematic. No title company will insure a tax foreclosed property in less than ninety days from the entry of Final Judgment, and in increasing number require a one-year time frame before title insurance against a former owner’s possible claim to vacate the judgment can be purchased. The reason for this is the unpredictability of judges, and the title company’s unwillingness to risk a claim based upon a motion to vacate the judgment. Personal service in the foreclosure is the best way to convince a title company to insure your sale after 90 days, but even that doesn’t always work.
Note: You cannot obtain title insurance on a property while it is occupied by the former owner. You must first complete an eviction, or the property must be voluntarily vacated.
Shameless plug – it is enormously helpful to you to use the services of an attorney and a title company who understands the tax foreclosure process when selling your REO.
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