Investing in Distress [View all]

[Passages]

Tax lien investing allows hedge funds and private equity firms to exploit mostly poor, elderly Black and Latino homeowners, leveraging the machinery of local tax enforcement.

BY ANDREW W. KAHRL APRIL 26, 2024

Earlier this year, the hedge fund Alden Global Capital cut a check for $1.75 million to Cook County, Illinois, for the right to prey on some of its poorest and most disadvantaged residents. The hedge fund—notorious for acquiring and gutting local newspapers across the country, and more recently gobbling up mobile-home parks while summarily raising rents, cutting maintenance, and laying off staff—purchased tax liens on over 600 tax-delinquent properties in the nation’s second-largest county. In exchange for paying these properties’ outstanding taxes, Alden Global Capital can charge an escalating rate of interest and attach fees to those debts. If the delinquent taxpayer fails to pay it all back within two years, they can claim ownership of the property.

Tax lien investing is a multibillion-dollar industry in America today, increasingly dominated by hedge funds and private equity firms. It is also a fundamentally predatory enterprise. It utilizes the machinery of local tax enforcement to exploit the hardships and misfortunes of struggling homeowners, and extract their wealth and property. Its chief victims, both the homeowners whose tax liens are purchased and those in the surrounding neighborhoods who suffer collateral damage, are poor, elderly, and disproportionately Black and Latino. Any attempts to promote greater access, affordability, and equity in U.S. housing markets—and undo the damage from racist and exploitative practices in the past—must first attack the financial forces that profit from and exacerbate those inequities today, and the laws that let them do it.

Illinois is one of 27 states that permit or even require local governments to sell tax lien certificates (equivalent to the amount of taxes a property owes) at public auctions once property taxes are past due. Through these tax sales, local governments get the taxes they are owed. The bidders get much more: a high-yield, virtually guaranteed return on their investment, either from interest (in many states, 18 percent or higher) and fees (in some states, virtually unlimited) that a homeowner must pay to remove the lien, or from taking ownership of the property when they cannot.

https://prospect.org/economy/2024-04-26-investing-in-distress-tax-liens/