New Jersey
How It Works
New Jersey cities and towns sell tax liens on delinquent properties. A lienholder can file a foreclosure lawsuit after two years. But if the government holds a lien, it can file after six months. Upon a judgment of foreclosure, the lienholder takes absolute title to the property and may keep or sell it. Sale profits belong to the lienholder.
The Impact
Homeowners caught up in this process lose, on average, 90% of their home equity. For the 650 homes in our dataset, homeowners lost a total of $115 million.
Why It Matters
In New Jersey:
- 50% of homes were forcibly seized for tax debts less than the price of a 10-year-old Honda CR-V.
- On average, homeowners were forced to pay out and penalized for 30 times more than the original tax debts owed.
- Investors were able to keep $86 million more than what was owed to them.
Lynette Johnson, her husband, and their eight children immigrated to New Jersey from Guyana in 1993. In 2014, inspired by Lynette’s entrepreneurial background, her son Elton and daughter Shevon found an ideal commercial location to run a business in East Orange, New Jersey.
Lynette bought the property for her children. Elton would run a grocery-deli on one side of the building, while Shevon would use the other side for her shipping business. Lynette purchased the property for $55,000 and spent over $12,000 on architectural plans and permits for renovations.
The tax bills were sent to the commercial property during the renovations, despite a Letter of Agreement with the city that documented her home as the mailing address for the commercial property. At the time, the commercial property was missing a mailbox. Lynette never received the initial property tax assessments for the East Orange property and thus did not pay the first year’s property taxes. Consequently, she owed a property tax debt to the city, and the city placed a lien on her property.
The penalties for missed property tax payments in New Jersey can be swift and severe. If the owner fails to make timely property tax payments, the tax lien is sold at public auction.
Unbeknownst to the Johnsons, the city sold the tax lien at public auction to itself in October 2015. At the time of sale, Lynette owed $4,622.
Under New Jersey’s tax sale law, owners must be given two years to redeem before the foreclosure process can begin. Even though the city had Lynette’s Newark residential address on file, it never mailed notices to that address. As a result, the Johnsons remained in the dark for the next two years, during which the lien amount grew to nearly $20,000 due to punitive interest, penalties, and fees.
In fact, they did not know the city had foreclosed on their property in February 2018 until a month later, when a family member saw police towing vehicles from the property. Shevon rushed to the scene and was informed that the property now belonged to the city. She went straight to City Hall and offered to pay the lien amount in full, only to be told that it was too late.
Three months later, the city sold the property to private investors for $101,000 and kept all proceeds from the sale, netting an $81,000 profit.
While the government reserves the right to collect property taxes, it should never collect more than it is owed. Any money made from a sale beyond the value of the tax debt represents equity that should be returned to the owner. If the government keeps this profit, this is called home equity theft.
Represented by Pacific Legal Foundation, Lynette is fighting back in New Jersey courts to end home equity theft. The U.S. and New Jersey’s constitutions protect owners’ rights to just compensation for property taken. The New Jersey legislature, however, allows local governments to keep windfalls at the expense of property owners like Lynette.
While Lynette’s case, Johnson v. City of East Orange, relates to commercial property, the state’s home equity theft problem also harms residential property owners. In New Jersey, private investors foreclosed and sold more than 650 homes from 2014 through 2021 in the state’s 31 most populous cities. On average, homeowners lost 90% of their homes’ value—an average loss of $178,000.
Cities and private investors with deep pockets are gaining—unethically and unconstitutionally—at the expense of ordinary New Jersians who are losing their homes, businesses, and often their biggest source of savings.
New Jersey must end home equity theft now. The Johnsons did not deserve to have their entrepreneurial dreams crushed and their finances devastated over an honest mistake. A law that allows cities and private investors to plunder vulnerable property owners is immoral and must be amended immediately.
Resources
End Home Equity Theft Model Policy
Pending litigation
State Summaries
Download data
Legal Appendix
New Jersey Home Equity Theft Laws
Does the law commonly protect owners’ equity?
- Analysis
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No. Municipalities in New Jersey sell tax liens at a base price fixed by the amount of the debt. Bidders compete by bidding down the interest rate they will charge for redemption. If the rate is bid down below 1%, bidders may compete by offering to pay a premium over the debt amount. If the property is unredeemed, any premium paid for the tax lien is credited to the municipality’s funds.
- Citation
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N.J. Stat. Ann. §§ 54:5-32, -33.
Are there any exceptions to that rule?
- Analysis
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No.
- Citation
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N/A
Does the government sell tax liens, or does it sell property outright, and what procedures does it use for the sale?
- Analysis
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The government sells tax liens at a base priced fixed by the amount of debt, and bidders bid down on the interest rate that they will charge for redemption. If the interest rate is bid down below 1%, bidders may compete by offering to pay a premium over the debt amount.
- Citation
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N.J. Stat. Ann. §§ 54:5-32, -33.
What interest and penalties accrue for delinquent taxes, and who collects them?
- Analysis
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Interest on delinquent taxes is set by the municipality but may not exceed 8% on the first $1,500 and 18% on the remaining debt. After the tax lien sale, the interest rate for redemption will be whatever interest rate was offered by the successful bidder, and it must be paid to the lienholder to redeem.
- Citation
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N.J. Stat. Ann. §§ 54:4-67, 54:5-32.
What is the redemption period—the length of time to pay the debt prior to permanently losing title?
- Analysis
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Typically, the lienholder may bring an action to foreclose the property two years after the date of the tax lien sale. However, if the purchaser at the tax lien sale was a municipality, foreclosure proceedings may commence six months after the date of sale. In either case, redemption remains available until a final order of foreclosure is issued by the court.
- Citation
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N.J. Stat. Ann. § 54:5-86(a).
If equity is stolen, who profits?
- Analysis
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Where no premium was paid at the tax lien sale, the equity is kept by the tax lien purchaser. If a premium is paid, then the equity is divided between the purchaser and the government, commensurate with the amount of the premium.
- Citation
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N.J. Stat. Ann. §§ 54:5-32, 54:5-104.64.
How much time does the previous owner have to claim the surplus proceeds, and what are the procedures for claiming them?
- Analysis
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N/A
- Citation
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N/A
What types of foreclosures are used in the state?
- Analysis
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Judicial; for most lienholders, the proceeding is in personam. Municipal lienholders, however, may bring an action in rem.
- Citation
- N.J. Stat. Ann. §§ 54:5-86, -86.3, -104.32.
What types of notice does the state require?
- Analysis
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(1) Notice of impending tax lien sales, and (2) foreclosure proceedings carry the usual rules of notice in judicial action.
- Citation
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N.J. Stat. Ann. §§ 54:5-26, -27, -86, -90, -104.48.