Tax liens, or that time I tried to profit from other people’s debt

Leaning tree

Right after college, I started taking an interest in investing.

At the time, I worked with someone who was similarly interested. We’ll call him Ivan (not his real name).

Ivan was the person who introduced me to Rich Dad Poor Dad. He was so into Robert Kiyosaki that he bought his $200 board game. (I would never have paid that much money, but the game was kind of fun.)

Ivan might have been a little predisposed to harebrained schemes.

One of the things he got really excited about was tax liens.

People who own homes sometimes have unpaid taxes, and the bank puts a lien on their home. The bank then sells that lien off to the highest bidder. You can make up to 24% interest on those liens. And if the owner doesn’t pay, you can foreclose on the property!

Ivan seemed almost giddy at that last part.

He was very persuasive though. And he got me to do a lot of research. This did indeed seem to be a thing.

Up to this point, I had only thought about the stock market and more traditional wealth-building strategies. But 24%! Maybe I was just being a sucker?

I decided to investigate first-hand.

Finding a town

Laws vary by state. I was living in Pennsylvania at the time, and for reasons that escape my recollection, I couldn’t buy a tax lien in PA. But I could buy one in New Jersey, and I was just over the border from there. And in fact, I was quite familiar with the Garden State, as among much else, I had graduated from a university there.

I called around to a lot of municipalities in the area I was most familiar with. Most didn’t give me the time of day.

But I found a helpful person in Magnolia, a small borough not far outside of Philadelphia. They agreed to send me a list of properties up for lien sale, and invited me to the next auction.

I drove around the cute and sleepy town, identifying the properties with liens I could afford, and wondered at the situation of the owners. Who were they? Why were they delinquent? None of the properties looked particularly out of sorts. They weren’t abandoned. What was going on?

Magnolia, NJ house
A typical house in Magnolia, NJ (Source: Google Maps)

But I realized that it did me no good to wonder about these people and their houses. This was all enshrined in New Jersey law. These people had to pay their taxes. What did it matter to them if they paid me instead of the state?

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The day of the sale

On the day of the tax sale, I arrived at the Borough Hall. There were maybe 20 people in there, all much older than me. Most, if not all of them, were representatives from area banks. I don’t recall any free agents like me.

The way it worked was that participants bid by interest rate. The bids started at 18% (the highest allowed by NJ law), and went down in 1% increments.

The officiant started at the top of the list. “Bidding will begin at 18%.

17%.

16%.

15%.

I swiveled my head back and forth as people quickly went through the bidding process. The first property was sold at 3%. This meant that the owner of the lien would only receive a 3% return.

Bidding continued, each as swift as the one before. And always, the final bid was a single digit return.

I actually worked up the nerve to bid on a few properties, always as an early bid, and always I was heavily outbid.

It got more surreal. Bidding could proceed beyond 1%, and often did.

0%.

Negative 1%.

Negative 2%.

These people were now paying for the privilege of owning the tax lien. This wasn’t an investment anymore. What was going on? What was the point of all this?

An hour or so later, all properties had been auctioned off. The representatives shuffled off, all in a day’s work. This was their job, to buy tax liens that earned nothing, or less than nothing.

I was left reeling. I thought the point of owning tax liens was to make a return on investment. These people weren’t earning anything.

Unless the point was to buy up all the properties possible, against the day when one of them defaulted, at which point the bank would take possession of the property. Maybe the occasional foreclosure made up for all those fees?

I walked out of the Magnolia Borough Hall in a daze.

I am not a bookie

I could have found another town and a different list of properties, and tried my hand at another tax lien sale, but I didn’t. Perhaps I was cowed by the “professionals” in the room. Perhaps I just got too busy.

But with the benefit of hindsight, I realized that I was deeply uncomfortable with the idea of purchasing and profiting off of a stranger’s debt.

Why? As I asked above, if someone has to have a debt, what’s wrong with them paying me rather than into the machine of some faceless bank?

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Maybe nothing. But it feels too much like I’m playing the part of a bookie, profiting off of people’s misfortune.

And what if I’m eligible to foreclose due to non-payment? Would I do it? Would I willingly throw someone out of their home if I had the ability to, for the money?

I don’t ever want to have to be in the situation to find out.

And that’s really what it comes down to for me: I don’t want to be a lender. I don’t want to have that kind of power relationship, even with a stranger. I certainly don’t want that with anyone I know. I’d rather work with those people who are in tax arrears and get them out of their situation.

When it comes down to it, owning people’s debt doesn’t seem worth it, even to earn a higher return. I guess I’ll just have to earn those measly single digit returns that the stock market historically returns.

But enough about me. What do you think of tax liens? Should I have gone for it anyway?

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