Get Thrown in Jail – Buy Tax Lien Certificates

Get Thrown in Jail – Buy Tax Lien Certificates
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One of my first posts was about buying risky properties called the One Cardinal Rule of Tax Lien Investing; however, with some recent headlines in the news lately, I may have to change my one cardinal rule to don’t get thrown in jail buying tax lien certificates!

Bid Rigging at a Tax Lien Certificate Auction

For those new and old to the tax lien auction world, you should take time before each tax lien purchase and make sure you fully understand the rules about bidding in these auctions.  For three New Jersey tax lien investors, they sure didn’t and have subsequently pleaded guilty to felony charges (see this release from the DOJ).

Collusion at the Tax Auction

What is collusion? It’s when two or more investors get together to limit competition at the tax auction.  How does it happen at when buying tax lien certificates?

In most cases, an unscrupulous investor will approach other investors before the auction and get them to agree to not bid on certain tax liens.  It may be as innocent-sounding as someone asking you not to bid on a lien because they know the family that lives there or that they own another tax lien on the property; then, they buy the lien at the maximum rate.

No matter what the reason, it’s a felony under the Sherman Act and opens the investor up to 10 years in a federal prison plus a possible $1MM fine.

Conspiracy before the Tax Auction

Collusion becomes a much more egregious  crime when two investors conspire together and plan out exactly how they will rig the tax auction.  This happened in Maryland a few years ago when two bidders worked out a system to each bid a certain liens between each other rather than fairly competing (see DOJ brief).

The Solution is Simple

Prior to and when you attend an auction, do not discuss your bidding strategy with anyone.  It’s OK to make small talk with your fellow bidders but do everything you can to avoid the topics of what you’re going to bid on and the rates you plan to buy at.  If someone presses you about whether or not to bid on a lien, just tell them you can’t discuss it with them and walk away.

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