Every day, all across the country, real estate taxes go unpaid.
It’s no secret that real estate taxes generally represent the majority of a county’s revenue; and they need that revenue to provide services like firefighters, police officers, roads and bridges. In more than half of the U.S., counties are required by law to collect unpaid taxes through the sale of tax liens to investors — counties sell a certificate that grants the right to collect those taxes, plus interest and penalties, to investors for the amount of the outstanding tax alone. This allows the county to balance their budget and operate without a revenue deficit — it’s great for the county, and investors like the opportunity, too.
But while the sale of real estate tax liens to investors is a process that dates back to the early 1900s, it’s not the unexplored territory it used to be, according to Chris Gleason, managing director at MMG Capital.
“The tax lien industry isn’t a secret any more,” said Gleason. “Anyone can register, walk into an auction, and bid. There are thousands and thousands of tax lien investors across the country, and that makes the market competitive.”
It’s become so popular because it’s an exceptionally low-risk investment in general, according to Gleason, who noted the overwhelming majority of tax liens investments eventually get paid back to the investor — plus interest and fees.
“That’s because no one’s interested in losing their house over a tax lien that represents 1-3% of the property’s value,” said Gleason. “Over 95% of property owners redeem their unpaid taxes within their state’s statutory period. For the ones that don’t, the certificate holder has the opportunity to do what’s called ‘filing for deed’ — the equivalent of foreclosing for a tax lien.”
Filing for deed starts the process, and the property owner is forced to “redeem” (e.g., pay up), or the property will go up for sale.
“At that point, if you’ve done your due diligence and you have a piece of property that has value, someone’s going to come along at that foreclosure sale and pay for the property,” said Gleason. “And that essentially gets you redeemed, too. Over 99% of the time you get your money back, plus interest and fees.”
And that’s the goal. Gleason points out the biggest misunderstanding about the tax lien industry is that people think everyone’s in it to acquire real property. “No one should be going into it because they want to buy property for $500,” said Gleason. “Realistically, you’re not going to acquire property this way — unless you’re buying tax liens on worthless property nobody wants. Then you might end up with it — and you’re going to be mad that you did.”
While the concept of investing in tax liens is very attractive, and in many ways very simple, the reality of doing it in a competitive market is complicated once you’re on the ground, according to Gleason; between the ins-and-outs of varying state laws, timing, and bid structures, to say nothing of traveling to auctions and servicing the liens once you buy them, the real rate of return for a small investor shrinks quickly. Gleason and MMG Capital structure the purchase of tax liens as a pooled fund opportunity — at once spreading out an investor’s risk and increasing yield.
“The rates that you can achieve by yourself, with not a lot of money, are not very high,” said Gleason. “First of all, you’re competing with people like us; we come into these auctions with millions of dollars. Second, if there’s a larger parcel out there, say an apartment building, that’s valued at more than you have with a lien on it that’s larger than the amount of money that you have to invest — you’re just not a player for that a parcel that size, where rates of return can be much higher.”
Unless you’re coming into the tax lien industry with substantial resources, Gleason says most of the time you’re going to get squeezed out — and you certainly won’t be able to achieve any of the economies of scale fund-based buying allows.
“An investor who tries to walk into one of these auctions by themselves with $50,000 may be able to buy 50 certificates at $1,000 each,” said Gleason. “But working with a group of investors, we can pool our resources and buy 1,000 certificates — further diversifying the risk.”
And in the unlikely (but possible) event one of those properties goes “bad,” so to speak, it’s going to appear pretty insignificant in comparison to the overall pool of liens. It’s a model that’s made a historically safe investment even safer — and more profitable.
“What we do is we make it a passive investment, and we’re able to enhance the rate of return for investors because of the economies of scale,” said Gleason. “We’ve been able to produce great returns in very safe, reliable investments — that’s very attractive in an uncertain market.”
Gleason says he continues to think safety and security are the right watchwords for investing right now more than ever before — and that MMG’s group of investors are like-minded.
“You can’t find a more favorable risk vs. return scenario in real estate,” said Gleason. “Pooled investing in tax liens is an extremely safe and reliable investment that’s also very profitable — when you know what you’re doing.”
Gleason laughed. “We’ve challenged some very sophisticated people to find us a more favorable risk/reward investment out there, and so far, no one’s been able to do it.”
For more information on tax liens and MMG Capital’s investment fund, visit the website: www.MMGInvestors.com