I went to a tax sale yesterday in an out of the way rural municipality in New Jersey. Unlike most of the tax sales in New Jersey this sale was poorly attended. New Jersey is a very competitive state for tax lien investing so this was an uncommon event.

Most serious bidders arrive an hour before the sale starts. At first, I was pleased to see, with less than an hour to go before the sale, that there was only one other bidder there. Then I did my research on the properties that were left in the sale and I discovered why other investors didnt bother with this sale. Out of the thirteen properties that were left in the sale, there was only one decent property. All of the other properties were vacant land and when I looked on the tax maps and checked with the zoning department (this is why I arrive at the sale an hour early) I found out that none of these properties were build-able lots. Most of them were land locked and none of them were large enough to build on, even though one parcel was a three-acre lot.

Since the other bidder there was a professional bidding for an institutional investor, I decided not to bid on any of the properties in the sale. I knew that if I bid on the one property that had a house on it, the professional bidder would bid high premium for it, so I decided not to bid him down and not to bid on any of the other properties since they wouldnt be profitable. I stayed around to see what would happen at the sale.

About fifteen minutes before the sale three other bidders arrived. These investors were new to tax lien sales and did not really know anything about them. They asked the tax collector a few questions before the sale and indicated that they really werent there to bid but intended to watch since this was their first sale. When the sale began the tax collector let us know which properties had prior liens. Four of the undesirable properties had prior liens. I was not surprised and this just confirmed my suspicions that these properties were not worth bidding on. If they were, then the prior lien holder would have been there to bid on them, or would have paid the subsequent taxes and prevented them from being included in the tax sale.

The tax collector announced the first property, and seeing that no one was bidding on it, one of the inexperienced bidders could not resist. He bid 18% and was awarded the lien (this was the 3 acre landlocked and undersized lot you need 5 acres to build here). The next three properties were struck off to the township at 18%. The next property was the only one with a house on it and that went to the institutional buyer at 18%. There were eight properties left. Another one went to the township. The temptation to bid and get a get a lien at 18% was too great for the other two new investors; they bought three liens each, each one at 18% interest. Fortunately for them, they were very small liens.

After the sale, I explained to them that they should check the zoning on properties before they bid on them. The tax collector does not tell you before the property is sold if it is unusable property and that is why the owner did not pay the tax. The tax collector only has to convey that industrial properties may be subject to the Environmental Clean Up Act, the Spill Compensation and Control Act, or the Water Pollution Control Act. And this is usually done in fine print; on the notice of the sale and the bidder information sheet.

When it come to buying tax liens, and this goes for other states as well as New Jersey, its buyer beware. As the investor, it is your responsibility to make sure that the property that you are purchasing a tax lien certificate on is a valuable piece of property. Even in states like New Jersey, where real estate is at a premium and has increased in value tremendously over the last five years, there are still tax parcels that are worthless. In many areas of the state, municipalities have been steadily increasing the zoning requirements for all types of properties. In many rural areas you need a few acres in order to build a house.

I know that many of you are under the false assumption that if you are a holder of a tax lien certificate; you are guaranteed to get paid. This is not true; it is a misrepresentation that is fostered by real estate infomercials and high priced seminars. The truth is that no one guarantees that you will be paid. You are first in line to get paid, but there are circumstances in which you might not get paid. You do have the right to foreclose on the property if you dont get paid within the redemption period, but what if the property is worthless? Than you have a worthless piece of property that you have to pay taxes on.