The Tax Lien Industry

Thu. May. 30, 2024

This web page explains what a tax lien is, how and why it is an investment opportunity, how even this apparently high quality investment can go bad, and how and why Cherokee can sometimes help investors and municipalities turn their nonperforming tax liens into cash and community development.

For NJ Tax Collectors

This page is for the New Jersey Tax Collectors , people who have tax liens to sell us, and those in other states.

This web site is primarily focused on the real estate aspects of Cherokee Group's business. On this web page, we will briefly cover the topic of Tax Liens as they relate to Cherokee's business.

For more comprehensive coverage of this topic, and how Cherokee can help investors and taxing authorities get cash for their tax liens, and use them as a tool for community development, please see; Tax Liens and Better Municipal Finance and; Why Government Should Sell Tax Liens to Cherokee.

This web page is intended for investors. Much of it is introductory in nature. If you are a Tax Collector or Assessor, or if you understand the tax lien industry, and your interest is primarily related to municipal finance and community development, please go to our Resources for Tax Collectors + Public Finance Officers web page.

Non-Performing Tax Liens

There are many reasons that an apparently safe investment, like a tax lien or a regular mortgage, can go bad. Some of these include bankruptcy by the property owner, decay or destruction of the collateral property, newly discovered contamination on an adjoining property, newer higher priority tax liens, allowing a tax lien to increase in value while the collateral decreases in value, or some combination of these and other factors. The bottom line is that it is possible for any apparently safe investment to be compromised, and tax liens are no exception. The end result is that someone owes you money, but you can't collect it. See Non-Performing Tax Liens for more information.

So what can you do?

Collecting on Tax Liens

This again is an oversimplification, and different in various states and situations, and is different for private investors versus government agencies, but you basically have three options:

  1. Do nothing, and hope that you will be paid in the future;
  2. Attempt to collect the debt either yourself or using a collection agent or equivalent
  3. Sell the debt to someone else, and get your money back immediately

If you have decided to wait and see what happens, we wish you luck, and ask that you keep Cherokee in mind if you decide to consider action in the future.

If you are a private investor who owns or manages non-performing, or under-performing tax liens, and you are researching ways to recover your money, please see Help for Owners of Non Performing Tax Liens. To see our pitch as to why you should contact Cherokee when you decide to sell your tax liens, please see Why Private Investors Should Sell to Cherokee.

If you are a government entity that holds non-performing tax liens, including liens on contaminated properties, and your governing body has traditionally waited to see what would happen, but you are researching ways to improve your cash flow, and facilitate community development, please see Why Government Should Sell Tax Liens to Cherokee .

For more information please contact Jay Wolfkind using our webform in Contact Us or call Cherokee's Red Bank, New Jersey office at (732) 741-2000.

About Tax Liens

What is a Tax Lien?

In the context of this web site, a tax lien is a debt secured by a lien on a piece of property. It's like a new first mortgage on a property, created by the taxing authority because the owner of the property did not pay the real estate taxes when they were due.

By operation of law, which is similar in many states, a taxing authority (usually a county or municipality) can secure its right to get paid, even before pre-existing mortgages, by creating a Tax Sale Certificate or other security instrument, and recording it in the land records of that jurisdiction, or by selling (see below) the right to own and record this lien to an investor.

So the government is owed money, and it has the power to record a lien so that the property cannot be refinanced or sold without paying the lien. But it is still a problem, here's why:

The government has bills to pay. Salaries, rent, all the financial obligations that any other service organization has. Plus, a portion of its collection gets passed on to other government agencies up and down the line. So if taxes are not collected, it's the same as when a lawyer or accountant does work for someone, but they don't pay. So the attorney sues and gets a judgment. But that doesn't get you the cash.

One option open to the taxing authority, and to the private judgment holder, is to enforce collection. Another option is to sell this financial asset to someone else, and get the cash now. This is exactly what many taxing authorities do ...they hold a public sale and offer these financial instruments to investors.

To an investor this appears to be a very safe investment. You have a first priority mortgage on a piece of real estate, and you get interest income. Each state has its own rules, but essentially you are stepping into the shoes of the taxing authority. An investor pays the taxes on behalf of a property owner, and that property owner now owes that money to the investor. The property owner is a debtor, and the investor is a creditor. If the debtor doesn't pay, the creditor forecloses. In most states, this is similar to a mortgage foreclosure. The investor either gets paid, or gets the property. This is an overly simplistic explanation, but for purposes of understanding tax liens as investments, it suffices for purposes of this web site.

Approximately 1,200 taxing authorities issue tax liens in the United States. Most states collect taxes at the county level. In New Jersey each of the 566 municipalities collects its own taxes. In some states, like New York, overlapping taxes may be issued by different levels of government, such as both a locality and the county.