Towns make millions from tax misery
Hunched over spreadsheets, a dozen or so real estate investors at Manchester’s Oct. 6 tax lien auction barely looked up as they raised their index fingers and methodically called out bids on more than 200 delinquent properties. ● The sale took less than 90 minutes, and when it was over, the township deposited more than $160,000 into the municipal treasury. ● The real drama comes later, when property owners realize just how costly it can be to fall behind on property tax payments. Many of these liens, debt now owned by a range of investors from private citizens to corporations, carry annual interest rates as high as 18 percent. That’s how relatively small tax debts can quickly snowball to many times what was originally owed. ● What’s more, if the debt isn’t paid in full within two years, the lien holder has the right to seize the property through foreclosure. It doesn’t matter if the initial unpaid property tax or municipal water or sewer bill was for as little as $41, as some in the Manchester sale were. That’s been the law in New Jersey for decades. ● Hundreds of these auctions each year put the teeth into New Jersey’s property tax bite.
It’s a system that generates more than $325 million in annual revenue for the state’s municipalities — and huge profits for major Wall Street firms and other institutional players that have muscled out mom-and-pop investors in recent years, lured by the possibility of earning double-digit rates of return.
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“When you think about it, where else can you make 18 percent on your money?” asked Vincent A. Belluscio, executive director of the Tax Collectors and Treasurers Association of New Jersey.
In the Manchester sale, three institutional investors walked away with more than half of the liens. Another 17 percent of the liens, mostly the smallest ones, didn’t attract any bids and defaulted to the township. The interest rate on those liens is 18 percent per year.
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Across the U.S., 29 states and the District of Columbia use tax lien sales to ensure that delinquent taxes are paid in a timely fashion. Some states, such as North Carolina, simply keep liens on properties until the debt is paid or the property is sold. Others, including Delaware, sell tax delinquent properties to the highest bidder.
Of the states that use tax lien sales, though, none does so with the same gusto as New Jersey. On a per capita basis, it sells more liens than any other state, an average of 400 per day.
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Last year, the sales amounted to more than 146,000 liens totaling over $327 million in unpaid bills, according to data from the National Tax Lien Association, an industry trade group based in Jupiter, Florida. It is part of the tax misery that towns seldom publicize.
When an Asbury Park Press video journalist tried to photograph and videotape Manchester’s auction, which was open to the public, he was barred from using his camera and escorted from the room by two police officers.
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“You can’t have cameras,” insisted tax collector Andrea Gaskill, who was running the sale.
Gaskill and the township’s court administrator, Tracy Barcus, insisted that cameras weren’t permitted for security reasons, since the auctions are held in a meeting room that doubles as the municipal courtroom.
Citing guidelines issued by the New Jersey Supreme Court, Barcus said the Press needed to obtain prior approval from the Ocean County court administrator to use cameras or recording devices.
That was wrong, the Press found.
The guidelines don’t apply to tax lien sales, meetings of the local governing body, or any other proceedings that aren’t court-related, state and county officials told the Press afterward.
“This didn’t have anything to do with a court,” said Winnie Comfort, a spokeswoman for the New Jersey Judiciary.
When ‘zero’ isn’t zero
Usually, the people who turn out for these sales have done their homework, says Wall tax collector Kammie Verdolina, the current president of the tax collectors and treasurers association.
They’ve sized up the property’s worth and the likelihood that the lien eventually will be redeemed, and calculated exactly how much they can bid and still turn a profit.
As auctions go, tax lien sales, which municipalities are required to hold at least once a year, hold all the entertainment value of an IRS audit. Increasingly, towns are conducting their lien sales online.
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Manchester still does it the old-fashioned way. As is often the case, its sale attracted a handful of investors, mostly middle-aged men casually dressed in blue jeans, polo shirts and sneakers.
Gaskell, the tax collector, called out the block, lot and lien amount of each property, then the bidding began, starting at 18 percent, the maximum interest allowed.
“Eighteen.”
“Ten.”
“Zero.”
And on it went, each bid knocking the interest rate downward so as to make the lien less attractive to the competitor.
In more than 50 instances, the bidding quickly went down to zero percent, at which point the remaining bidders would offer increasing cash premiums in an effort to secure the lien. It is the equivalent of a bidder on a house offering more than the list price as a way to get one-up on another bidder.
In all, in one morning, the township received more than $400,000 in premiums, ranging from $100 to nearly $67,000. The township will place that money in an escrow account, keeping the interest for itself. If the property winds up being foreclosed, or if the lien isn’t redeemed within five years, the township can keep the full premium. Otherwise it eventually goes back to the lien holder, less the interest.
Buying a lien at zero percent interest isn’t as counter-intuitive as it may sound, Verdolina says. Investors can still earn up to 18 percent interest on the subsequent municipal debts they cover while they hold the lien. Manchester, like most towns, fixes the interest rates on those debts at 8 percent for the first $1,500 and 18 percent for any amount above $1,500.
“Most people who put the premiums out know they’re going to get the interest elsewhere,” Verdolina said.
The threat is enough
While it’s possible for someone to lose a home through a tax lien foreclosure, such cases are rare, experts say.
“Nine out of 10 times, there’s a redemption once the foreclosure process starts,” said Belluscio of the tax collector and treasurers association.
“You don’t lose a single-family home that’s worth $500,000 for $10,000 (in lien fees), you just don’t,” said Bradley P. Westover, the tax lien association’s executive director. “You find a way to pay it.”
Most investors aren’t interested in seizing the property, anyway, he said. They’re after the interest they can earn on the lien. Liens of more than $200 also carry a one-time penalty of 2 percent to 6 percent of the lien’s face value, depending on the amount.
With interest compounding annually, in two years a $5,000 lien earning 18 percent interest would cost $6,962 to redeem, not counting the penalty. In five years, the same debt would swell to $11,439.
At least one homeowner impacted by the Oct. 6 lien sale didn’t seem to fully grasp exactly how precarious her situation might be. Prior to the sale, the 66-year-old retiree owed nearly $2,000 in unpaid taxes and utility bills for 2014, and had fallen behind on this year’s payments, as well. Her small one-story home, which she bought in an adult community for $49,900 in 2009, is now assessed at $55,500, tax records show.
Though she considers her property taxes “dirt cheap” — less than $1,500 last year — she said she ran into trouble trying to help out her grown children with their financial problems. Her plan is to use money from an income tax refund to pay off the lien, but the refund hasn’t arrived yet and her bills are mounting.
The winning bid, by Actlien Holding Inc., was zero percent, with a $5,000 premium. A company official declined comment.
“I screwed up, helping my family,” said the woman, who asked to have her name withheld to protect her privacy. “It’s embarrassing more than anything.”
Sunday: What you can do to fight rising property taxes.
Shannon Mullen:
732-643-4278; smullen4@gannettnj.com
$327M
The amount municipalities raise by selling to investors liens on unpaid property taxes and other municipal bills.
146,000
The number of liens sold last year
400
The average number of homes put at risk each day from the tax lien sales. Lien holders can foreclosure after two years of non-payment.
18%
The maximum interest rate lien holders can collect on unpaid tax bills.
Source: National Tax Lien Association