You used to be able to make at least 18% per year on tax liens. These are debts sold by local communities to raise money on their property tax income.
It took a lot of time to invest here, but I know investors who do it. One man I know would not go into any deal that paid less than 18%. He got that in tax lien money. That was his bottom line.
No longer. Hedge funds have finally entered the market in a big way. Rates have fallen like a stone. Demand is way up. The hedge funds now control 40% of this market.
But there is a problem. It takes leg work to see if the properties backing up these tax bills are worth much. Sometimes the properties are nice homes. Mostly, they are not.
The media get headlines when home owners are evicted. The hedge funds get blamed, but the cities would have done it, or private investors would have done it. When you don’t pay your property taxes, you risk getting evicted.
For two decades, the tax lien market was “mom & pop,” meaning local lawyers and other local expert real estate investors who knew local markets. Now the big boys have finally entered the market. It’s good for local governments. They don’t have to sell these claims to future income at a steep discount.
There is a problem, of course. The hedge funds cannot possibly investigate the quality of all the properties undergirding these claims to future income. Think “Detroit.”
Like the packaged mortgages sold by Fannie Mae and Freddie Mac to investors, the bulk purchase tax liens are not homogeneous. The local information needed to make wise decisions as to collateral is not available to hedge funds.
In the next economic crisis, this will become apparent to hedge fund operators. In the meantime, they are paying top dollar for higher-yield investments. It’s great for local tax collectors.