Tax Lien Foreclosure vs. Mortgage Foreclosure in New Jersey
Understanding the different types of foreclosures in New Jersey is critical when determining what types of defenses are available to the people when trying to save a home from foreclosure.
There are basically two types of foreclosures in New Jersey. The one that most people are used to hearing about is when a Bank forecloses on a home after someone stops the mortgage. The New Jersey Foreclosure that most are not familiar with is based on Tax Sale Certificates. As with any sort of property rights, the process is not simple. The whole process though is set-up so that New Jersey municipalities can ensure revenue, there is less blight from zombie properties, and gives investors a tool to buy homes in New Jersey far below the market value.
New Jersey Tax Sale Certificate Foreclosure is a Tax Lien Foreclosure
A property owner faces losing his or her property once he or she stops making tax payments or paying sewer and water bills. Once a property owner fails to make property tax payments as required by New Jersey law, the property may eventually subject to a New Jersey Tax Foreclosure. It seems like this type of foreclosure would rarely catch someone off guard, but this process happens more frequently than people realize. In the last 3 months my firm has dealt with issues where an Executor of an Estate had no idea that the taxes that were not being paid, another case involved a trustee embezzling rent income and not paying the taxes, a third case involved an LLC that had changed locations but never updated its tax records or forwarded its mail, and a fourth case involved someone that did not have the correct address of their rental property and claimed they had never received notice. In all of these situations, we were able to save the properties from being lost, but everyone involved had penalties and interest that had to be paid.
As mentioned earlier NJ Tax Sale Certificate foreclosures are based on a complicated process as defined in the New Jersey Tax Sale Law, N.J.S.A. 54:5-1 et seq. This law requires that the almost 600 towns/municipalities in New Jersey hold annual sales of unpaid real estate taxes. Municipalities can hold these sales more frequently than once a year, but each town in New Jersey is guaranteed to have at least one sale each year. These “Tax Sales” try to guarantee that the municipalities receive all of the revenue they have budgeted for the year from taxes by selling Tax Sale Certificates that then can become liens against the property. However, if no one bids on the tax sale certificate the municipality will still be the holder of the tax sale certificate.
New Jersey Tax Sale Certificate Foreclosure taxes less time than a New Jersey Bank Foreclosure
Unlike a Foreclosure Sale held by a County Sheriff when the property is sold and the Sheriff issues a deed, these NJ Tax Certificate Auctions are based on people bidding on the interest rate to be charged on the Tax Lien that will be placed on a home. The holder of a New Jersey Tax Sale Certificate does not own the property. Instead, the winner of the Tax Sale Certificate now has a lien against the property in the amount paid for the Tax Sale Certificate plus interest and penalties which will continue to accrue. Interest rates at the auctions start at 24% and can eventually be bid down to zero. The people or municipality that bid on the certificate are then entitled to be paid the interest rate they win on the tax sale certificate. It may seem odd that someone would bid to be paid 0% interest but with the prospect of being able to get a property for the value of a tax sale certificate can be very inviting.
Pretend Bob Homeowner dies owning a home worth $500,000 and only has a loan worth $200,000 against it. Once the mortgage payments stop being paid the Bank could eventually foreclose on the $200,000 note held by the bank. This is a long process and can eventually lead to the Estate losing the home. Under the same scenario, it is possible that the Bob stopped paying his taxes before he died, and the bank did not pay them for him. So now there could be a tax sale certificate sale that would place a lien on the house because of a previously held New Jersey Tax Sale Certificate Auction. So in the above case, we can pretend $10,000 in taxes were due to the city. The city would auction off that debt and a tax sale certificate would be issued. Normally it takes at least two years for a tax lien to be redeemed, but with vacant properties, they can have tax sale certificates foreclosed in as little as 6 months under the New Jersey Tax Sale law and if a municipality owns the lien it can also be foreclosed on in 6 months. In an occupied property, someone seeking to foreclose would pay off the taxes for the next two years so that he or she would be eligible to foreclose and subsequent liens paid start to accrue interest at an 18% rate. N.J.S.A. 54:5-6 (declaring property taxes a continuous lien to which subsequent tax accruals are added); N.J.S.A. 54:4-67(1) (declaring that delinquent property taxes accrue interest at a rate of 18% per annum on amounts over $1500).
New Jersey Tax Sale Certificate Foreclosure have defenses
A tax sale foreclosure requires all parties with interests in a home to be notified, which includes that bank in the previous example. If a final Tax Sale Judgement is reached, and no one has responded to being served everyone that has rights in the property would lose their interests in the property. If someone has a life estate, it would be extinguished. If the bank has a mortgage on the property it would not have to be paid. (This is one reason that many banks choose to pay the taxes on properties even when the homeowner stops making payments.) For a small investment of $20,000 a person has a chance at getting a home worth $500,000. This is why investors are willing to get zero percent interest on their money and in some cases offer a premium to the Municipality for the privilege of getting the tax sale certificate. See N.J.S.A. 54:5-32 (stating that the bidder at the tax certificate auction accepting the lowest rate of return wins the auction and if the rate falls to 0%, the bidder offering the highest premium wins) It can also be very difficult for someone to come up with over two years of taxes in a short period of time if they have accidentally fallen behind on his or her taxes and now faces a foreclosure. If the tax sale foreclosure is against an abandoned property the process can go from two years to 6 months. See N.J.S.A. 54:5-86 Authorizes tax lien holders other than municipalities to institute in rem tax foreclosure actions against abandoned properties.
New Jersey Tax Sale Certificate Foreclosure can be avoided with the help of an Investor
Trying to redeem the property taxes is not always as simple as it seems. (see ROBERT DEL VECCHIO v. BARBARA LEE CHARTOIRE “Cherrystone’s failure to timely intervene in the foreclosure action fatal to its position, the appellate panel affirmed.”) The property owner has the right to redeem the property by paying the taxes, along with interest and penalties. In cases where the municipality holds the certificate when they were the highest bidder or no one bid on the property, and if the people with property interests in the property fails to redeem within six months, the municipality may start a tax foreclosure proceedings against the property as municipalities do not need to wait the two years that are required of third party bidders at New Jersey Tax Sale Auctions. New Jersey foreclosure based on tax sale certificates takes place by filing a complaint in New Jersey Superior Court listing the properties subject to tax foreclosure, providing notice to the property owner, and everyone else with a property interest and any lien holder even including the US such as if there is a federal tax lien, and publishing a notice of the action listing the properties involved, their owners of record and the amount due in a local newspaper. Since a New Jersey Tax Foreclosure will wipe out the property interests of private lien holders, the New Jersey courts have held that municipalities have an affirmative duty to notify anyone who has a potential interest in the property. When the notice is deficient, even in minor details, the title that the city obtains after the foreclosure process may be defective and uninsurable. My firm has worked with people that have interests in the property after Tax Sales have been complete to reaffirm their rights on the property due to deficient notice. We know investors that rather help people save their homes rather than see purchasers of New Jersey Tax Sale Certificates receive a giant windfall because of financial insecurity. (See ROBERT DEL VECCHIO v. VIVIAN CRESPO April 13, 2016, New Jersey Superior Court, Appellate Division – Unpublished Opinions On appeal from the Superior Court of New Jersey, Chancery Division, General Equity, Hudson County, Docket No. F-3069-13 “The Tax Sale Law clearly does not prohibit a property owner from seeking or obtaining financing to redeem a sales tax certificate and reclaim her property.” )
If you have a property interest involved in a home undergoing a New Jersey tax sale foreclosure, we can possibly file an answer to the New Jersey Tax Foreclosure Complaint for you based on the defense of invalidity of the New Jersey tax lien related to proceedings to sell the tax lien, or the New Jersey foreclosure action itself. (See R. 4:64-6. All tax sale certificates and the foreclosure proceedings are deemed valid unless their validity is challenged by a defendant. N.J.S.A. 54:5-100.) These arguments will not be enough to completely win your case as the money for the taxes will need to be paid for the lien to be removed. (See N.J.S.A. 54:5-99. The entry of judgment terminates the right to redeem in the described land. See N.J.S.A. 54:5-104. The judgment is then recorded and the Plaintiff becomes the owner in fee of the subject parcel.) If you need time to arrange a loan or need investors we can help.
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