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Tax lien investing offers a unique alternative to property ownership with the potential to generate passive income. They are an attractive tool for portfolio diversification, especially given the potential for return.
Jeff Piposar is the founder and managing partner of JA Piposar LLC, a law firm dedicated to tax lien auctions and strategy in the Midwest. Jeff is also the operating partner of LPL Residential LLC, a Chicago-based real estate firm dedicated to purchasing, rehabbing, and selling tax deed and off-market properties.
Click the play button above to listen to our conversation.
- What are tax liens and tax deeds and how can investors benefit from them.
- The pros and cons of tax lien investing and property acquisition.
- How tax buyers purchase delinquent taxes.
- Tax sales as a safe investment with extraordinary margins.
- How investors can get started in the tax liens and tax deed investing.
- Statutory technicalities that come with tax lien investing.
- Where the tax lien space headed and what are the key trends in this industry.
- Redemption period in real estate and the fees associated with the process.
Featured On This Episode
Industry Spotlight: JA Piposar LLC
JA Piposar LLC partners with Indiana tax auction purchasers for the purpose of bringing investor funds to low-income cities and towns in order to promote local investment and rehabilitation.
Learn More About JA Piposar LLC:
About The Alternative Investment Podcast
The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss diversification opportunities in the alts universe, including direct investments, DSTs, opportunity zones, private equity and more.
Jimmy: Welcome to The Alternative Investment Podcast. I’m your host Jimmy Atkinson.
Andy: And I’m your co-host Andy Hagans.
Jimmy: Joining us today on the podcast is Jeff Piposar. Jeff is founder and managing partner at JA Piposar LLC, a boutique firm that specializes in tax sales. And he’s here today to talk tax liens with us. He joins us from Park City, Utah. Jeff, welcome to the show.
Jeff: Hey, Jimmy, Andy. Thank you guys very much. As a very good friend of mine always jokes, nobody is in the fifth grade and looks at their teacher and says, “I wanna be a tax lien attorney when I grow up.” But yet here I am, and it’s a very interesting world. And I’m happy to sit here and chat with you guys about it and, hopefully, provide some important information for your listeners. So, thank you very much for having me.
Jimmy: Yeah, absolutely, Jeff. Thanks for joining us, happy to dive in with you. Maybe it took you until sixth or seventh grade before you had that realization, right?
Jeff: Yeah, that’s right. My mom said, “You’re gonna be an attorney,” and then that’s the end of it from there. And, so, here I am, at 41 years old, and sitting here looking at tax liens. Which, it’s funny, when you talk about that at a networking event or a cocktail hour or a bar, the majority of people kind of have a little bit of an eye roll. Right? Because, when people hear “taxes,” they automatically get bored, they start shifting their feet from side to side, and they go try to get another drink or they go try to speak with somebody who’s, you know, an actor or something a little bit more interesting.
But what I’ll get into a little bit today and what I find fascinating about tax sales is they are one of the absolute safest investments that you can make, they can be extraordinarily profitable, but nobody talks about it. And I find that confluence of those three aspects very interesting. And I talk about that with my clients. So, I’m excited that you guys invited me here today because we’re always trying to reach a broader audience, particularly audiences that may have heard about tax liens in the past, either from a friend or an associate at work or another colleague, and really have the opportunity to dive into it. Right? Because it is an esoteric area, it is an odd alternative investment for folks. But I’m glad that we’re here to, hopefully, clear up some of the aspects of tax lien. So, thank you again for the opportunity and I’m ready to go when you guys are.
Jimmy: I’m ready as well. It is definitely esoteric, I don’t know really what they are, I’m looking forward to learning more myself. So, to start us off, what are tax liens, Jeff, what is meant by that term?
Jeff: Sure. So, at its very basic level, what a tax lien is it’s when a property owner fails to pay their property taxes after a set period of time. And that could be typically a 1-year period of time. The county in which that property lies has the ability to hold an auction in which the property is put up for sale. Investors from not only around the United States but, frankly, I’ve had investors from all over the world, will come in and bid on these properties. And what they will win, at the end of the auction, is a lien on the property. Right? So, it’s a first priority lien that has precedence over anything else. So, it has precedence over, for example, your mortgage from Bank of America or a judgment that was placed on the property.
And that property owner then has a set period of time to pay back the money they owe to the county and keep their property, in which case the investor gets their money back plus penalties and interest. Or the investor gets to keep the property, typically for pennies on the dollar. So, that’s what a tax lien is at its most basic level.
Jimmy: Gotcha, good explainer there, Jeff. Thank you. But before we drill deeper into tax sales and tax liens, I’d love for you to share with our listeners a little bit of background on you, who are you, what path did your career take to get to where you are today, and what types of clients do you service these days?
Jeff: Yeah, those are great questions. So, again, from your guys introduction, Jeff Piposar, I’m the founder and managing partner of JA Piposar LLC. We are a boutique law firm, we are in the Indiana, Illinois, Midwest region. We’ve been doing tax sales now for about a decade. So, really what our firm specializes in is we partner with investors who are looking to participate in tax sales. And once that investor is successful at a tax sale and purchasing a lien, we go in and we help shepherd them and partner with them through the process to get them either to redemption, which means the current property owner comes back and they pay back their penalties, their owed taxes, their fees, their interest, and they get to keep the property, or the property owner fails to repay those owed fees and the investor ends up with the property.
So, that sounds like a pretty basic timeline right there but what happens with tax sales is there are a lot of statutory technicalities that you have to deal with in order to properly notify property owners, anybody else with an interest in the property, you have to go to court. There’s a lot of loopholes to jump through to make sure that, frankly, this person is getting the property in a legal and lawful manner. And that’s really where our law firm jumps in is partnering with those individuals.
I’d say, over the past decade, we have helped over 1,000 clients. We’ve probably shepherded over 10,000 properties successfully through this process. We have worked with everybody from literally the single mom who has $500 to spend and is looking to do something a little bit different than just throwing that in the market. So, we work with investors who literally have a couple hundred bucks to some of the biggest funds in the United States. We work with a number of funds who are, I would say, in the top 5, top 10 private largest tax lien funds in the U.S.
So, we have experience with both the small investor, we also have experience with the big corporate investor and literally everybody in between. We’ve seen the worst of the worst…and by that I mean I, unfortunately, had an investor one year who bought a meth lab, and that was not the greatest conversation to have with them. And then we’ve also had people who have had really really great success. And I hope to get into a few of those stories with you guys here in a couple minutes but, you know, I’ve had people turn a $9,900 investment into a $770,000 win in less than 2 years. Now, is everybody going to do that? No. Typically, you’re going to invest $5,000, you could make, you know, $15,000 or $20,000. But if you do that with enough properties, you do that over a number of different sales, you can make some really good money in tax sales if you have knowledge about it. And that’s really what I’m here for today is to try to provide at least that basic knowledge needed for your podcast members to, hopefully, get started in this world. So, that’s a little bit about me.
Jimmy: Well, that’s great, Jeff. Yeah, I would imagine not every investment property that you invest in is gonna be a grand slam home run, like that one example you shared. And you’re gonna strike out sometimes, and you’ll get the occasional meth lab, I’m sure, but if you do this enough times and diversify along the way and keep hitting enough singles and home runs, it’ll kind of balance out the strikeouts, I suppose. So, you’ve shepherded a lot of your clients through this process and you have a lot of great technical expertise and experience in order to do that. But you don’t just talk the talk, you’re also walking the walk you. You’re also using your expertise to perform your own active hands-on investments. Can you talk about some of your experience with going through this process yourself?
Jeff: Absolutely. And one of the unique aspects of our firm is we do participate in these sales ourselves. In the Chicago region, I’ve had a number of companies with 2 of the same partners over about the past 8 years. We started investing in multi-unit properties in the south and west sides of the city. We had about 700, 800 units at the top end of that. And then, as my experience with tax sales grew and my knowledge grew, not only from working in that space but also partnering with a number of my clients, we started divesting a little bit out of that world and also into purchasing single-family homes. Not only from tax sales ourselves but also other companies that invested in tax sales.
So, I understand sort of the trepidation an investor gets when they own a property and have never set foot in it and they finally have the keys and they’re about to open that door for the first time and see what they got. And it can be really a number of different worlds. You can walk in and a house can be pristine. It might need a few coats of paint, some new appliances, some new cabinetry, a basic dust up, and you can throw it back on the market. And I’ve also had homes where you go in and almost the entire back wall is gone. Right? It’s caved in.
Now, if you do your due diligence, you roughly know what you’re going to get. Right? You should know, and we knew, that that back wall was gone or the roof is caving in and you’re going to need some decent investment dollars to get that back up to the market. But if you have your model correct, you do your due diligence, you know what you’re buying, and you know your exit strategy, you can always be successful.
Because think about tax sales for the moment. One of two things are going to happen. The first one is you buy that lien on that property and the property owner comes back and pays everything back. Well, in that case, you’re getting your money back plus you’re getting interest in penalties that are determined by state law. They are literally in the state statutes. So, for Indiana, for example, the penalties that a property owner has to pay to get their property back are going to be 10% to 15% of your minimum bid at auction. It’s also going to be a 5% per annum penalty on the surplus. The surplus is whatever you paid over the minimum bid. So, you’re getting a blended rate somewhere between 8% and 14% on your property. And that’s happening within one year.
So, if you think about your average financial advisor, they’re saying, “We hope to get you 6.5% to 7.2% a year in the market.” Well, if I’m telling you, by statute, you’re going to get 8% to 14% and the state is demanding that and you’re getting that in less than a year. That’s a really good investment to take advantage of. And even better, if you don’t get that return, you get a property for as low as $500.
That’s what a lot of people don’t understand. They don’t understand that these penalties, these interests are mandated by state law. The state has to provide you that return should the property redeem. So, knowing this, doing your due diligence, you know that you’re either getting that return or you’re getting this property for extraordinarily cheap. And if you’re getting that property for $500 or $1,000 and you have to put $25,000 to $35,000 into it because of a buckling ceiling or a bad wall and you can list it for 80 grand, again, that’s a big win.
So, that is a little bit about where we have played also in the tax sale space as an investor. Now, we’ve gone above and beyond that, we still play in that space but we also invest now in high-end brand new builds for multi-million luxury properties and luxury markets like Park City. Which is why I’m speaking to you guys from Park City here today. But we can get into that aspect of things in a little bit down the line because that doesn’t necessarily have the same relationship with tax sales.
Andy: So, Jeff, let’s take an example of a High Net Worth investor. I mean a lot of our listenership are folks who are, you know, real-estate professionals or who’ve been successful investing in real estate. So, let’s take an investor who maybe has $200,000 or $250,000 and they’d like to leverage that amount of capital, plus their knowledge of their local real-estate market, to get started with this tax lien investing. What would the typical business plan or portfolio plan be? I mean it sounds to me like such an investor would wanna set aside some of that money as reserves in case that, you know, they end up owning any of these properties. Right? Because that sounds like that’s where a lot of the upside is. And then they’d also wanna maybe have a portfolio approach where they’re bidding on lots of different properties and sort of letting that blended average where, when they redeem, they get that guaranteed statutory return, that you mentioned, and then they also get some upside. So, what would that kind of model look like if I had, let’s say, $250,000 and I just wanted to start taking some bets around my local market? Assuming that I know that market very well.
Jeff: Yeah, that’s actually really interesting that you bring up those details because those are the type of investors that I see having the most success in the tax sale space. And you mentioned two things, one is you need some capital. You know, the people who are spending 500 bucks, they might have a nice little win and they might make a few thousand but it’s really the guys that have anywhere from, I would say, $150,000 to $400,000. And the second part of that is know their local market. You really have to have some knowledge about the local conditions to become pretty successful at tax sales. So, in your example, if you have somebody who has $200,000, yes. You’re gonna wanna keep a little bit behind for attorney fees, title fees, and some potential rehab fees.
One of the best clients that I’ve had I’ve worked with now for about 5 years. They came into this space a few years back with $250,000. They purchased 35 properties at one of the auctions in which the minimum bid was $500. Right? So, a low barrier of entry. They knew certain companies, a casino, certain plans were in development for big commercial builds in their location. And, so, they took some bets. They bought some single-family homes, they bought a few commercial buildings, and they bought a number of areas of vacant land that ranged between around 4 to 10 acres. And these were all bordering areas where they thought could see potential builds with the new plans going in.
So, of the 35 liens they purchased, they ended up with about 25 properties. So, 10 redeemed where they got the statutory interest rate. So, they made a nice return there. On the 25 that ended up, you know, in their possession where they became the owner, I would say 2 of them were home runs. And those home runs were based specifically on their local knowledge. They knew a casino was going in, they knew a big commercial development was going in. So, they bought 1 parcel of vacant land for $9,900, this is the example I provided you guys with earlier. They sold that for $770,000. You guys heard that right. They bought it for 9,900 bucks, they sold it for $770,000 in less than 2 years. Their other parcel of vacant land was an even bigger winner. That one was purchased for $25,000 and sold for 1.1 million dollars.
So, again, when people at the bar kind of roll their eyes when you say you’re a tax lien attorney, you tell them the returns on those two investments, people start paying attention very very quickly. But let’s be honest and let’s be clear and let’s be upfront, what was required to make those two stories a success? The first one was they had the capital to back things up. They also had the local knowledge and did the due diligence required to become successful. And then the third aspect of things, which we really haven’t touched upon yet, is they had an exit strategy. They knew, if they got that property, what they were going to do with it. And that’s really what’s required to be successful in this area.
And you can have 1,000 different exit strategies, right, you could rent the property out, sell it to a wholesaler, use it as a primary residence, sell it to a commercial developer, like these guys did, but you have to have one. And where we see a lot of people getting into trouble, over the years, is missing one of those areas that I mentioned. So, they’re either missing the due diligence. You don’t have to necessarily be on the ground in that area but you need to have eyes on properties, and that’s where the guy who bought the meth lab failed. Everybody in that area, in Indiana, knew that house was a meth lab. But this was an investor in Arizona and he never hired somebody to put eyes on the property. He never flew and drove around and looked at the properties he was bidding on. That’s an easy way you get into trouble.
The other way I see people get into trouble is they don’t have an exit strategy. They don’t know what they’re going to do, they bank on the statutory return. Well, if the property owner doesn’t pay it back, you’re now the owner. And now you own that property, you need insurance, you need utilities, you need to start paying taxes. If you don’t have an exit strategy and you didn’t plan for that, that’s where you get in trouble.
So, going back to your question, Andy, the individual with anywhere from 150,000 to 400,000 with local knowledge, that’s probably the individual that’s going to have the most success if they’re willing to do a little bit of work up front on the due diligence aspect to understand exactly what they’re buying.
Andy: That makes a lot of sense. So, it sounds to me like this space…I mean you do need some capital, there’s that barrier to entry. It sounds like you can maybe buy some $500 lottery tickets but to take a more serious tack in this space requires some capital. But more than that, it requires knowledge, as well as a willingness to be that more active investor, you know, who’s taking responsibility doing due diligence, knowing that local market.
So, I guess that that leads me to a related question. So, if most of the investors in this market segment are that, you know, very active more knowledgeable type of investor, are there funds that accept passive investors that do this at a very large scale or that maybe bid on properties that do require a lot more upfront capital to even bid on them? Or is it mostly just the playground of active investors?
Jeff: Yeah, that’s a good question. So, what I’ve seen in the space, over the past 10 years, is the space moving from more of sort of the solitary investor or two or three buddies that pull their money to much more of a fund space. You’re getting maybe a couple investors that each have $200,000, $300,000 to invest, they pull their money and they take advantage of their local knowledge. But you’re also now starting to get bigger funds that will operate in several states at one time, and those bigger funds have the money to buy the local resources to do the due diligence required to be successful at these auctions.
There are funds that do accept money. They’re a little bit more difficult to find because what those funds are typically doing is they’re typically raising money from the bank or they have a line of credit. So, they’re having an interest rate of 3% to 4% on the money that they’re borrowing and they’re making a blended return of 8.5% to 14% on their investment. So, they’re taking that delta. Their play is an interest-rate play.
That’s harder for an individual that has $200,000 to $400,000 to sort of get in there because that individual is going to want a bigger return on their money. So, I guess that person has a few options. Option one is what we’ve been talking about, become active understand your local community, and invest. Option two is get a few of your friends together and start a small fund that could be anywhere from a million to 2 million. You’d be surprised at how much damage you can do with 1.5 million dollars in some of these counties. You can buy a lot of properties with 1.5 million dollars. Or number three it’s find some of these funds that are willing to bring you in for a little bit. I’ve invested with a fund for over a decade now and their return is typically a flat 10%. And I would take that over the market, maybe not the market, you know, in the past few years, but, on a long enough timeline, if I know I’m getting a guaranteed 10% return, I’m pretty much gonna take that whenever I can.
So, those are really the three options. Option three’s the hardest just because it’s hard to find some of those bigger funds who would accept outside money.
Jimmy: That’s great, Jeff. A lot of interesting things to think about here. Thanks for providing all of the insight and expertise that you have today regarding tax sales on our podcast episode. We’re about out of time here but, before we go, where can our listeners go to learn more about you and the services that you provide?
Jeff: Yeah, thank you for the opportunity to say that. A couple different places. One of the things I do is I educate clients and non-clients, potential future clients, continuously on tax sales. If you’re interested in tax sales in the Midwest, particularly Indiana, somewhat Illinois, I’m always happy to speak with you. You can always feel free to give me a call at 412-527-1548. Again, always happy to set aside some time to speak about tax liens and tax sales to individuals. Email is always a great way to get in touch with me. My email address is [email protected], that’s J-E-F-F @ J-A-P-I-P-O-S-A-R .com. Again, feel free to email me at any time about tax sale questions.
If you’re interested in some other real-estate areas, such as investing in Chicago, whether it’s multi-unit, whether it’s single-family home, rehab and flips, or a completely different world, which I’m in right now working today, which is high-end luxury builds in which we’re building homes for about 2.5 to 3 million dollars and we’re selling them for 4.5 to 5 million dollars in luxury areas like Park City or other ski resort and resort towns across the United States, I’m happy to speak with you about that as well Because that is something that we are actually actively looking for investors for.
So, if any of those worlds touch yours, you wanna learn more, you have a few questions, please feel free to reach out to us at both that phone number and that email address. We’re happy to get in touch.
Andy: Fantastic. Awesome, Jeff. Please do reach out to Jeff if you do have questions on any of the discussion topics from today’s episode. And for you, our listener, out there today, I will have show notes on the AltsDb website, you can find those show notes for today’s episode at altsdb.com/podcast. And there you’ll find links to all of the resources that we discussed today with our guest Jeff Piposar. Jeff, again, thanks again for joining us, it’s been a pleasure.
Jeff: Thank you, guys.