Tax lien investing offers a compelling alternative to property ownership, with the potential to generate passive income from single and multifamily properties. They are an attractive tool for portfolio diversification, particularly because of potential return and limited downside.
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 tax liens are, and how investors can see attractive returns from them.
- What’s different about tax liens on multifamily properties versus single family homes.
- The story behind JA Piposar LLC, and how Jeff got into Tax Lien investing.
- Examples of creative and successful real estate strategies built around tax lien investing.
- What every investor should know about multifamily properties located in low income areas.
- How Jeff managed to stabilize a struggling property with a high vacancy rate by making one change.
- Why aligning incentives, especially with your property manager is so critical to success in multifamily.
- Why Jeff thinks it’s so important to “practice what you preach” in tax lien investing.
Featured On This Episode
- Investing in Property Tax Liens – Investopedia
- Jeff Piposar on LinkedIn
- JA Piposar LLC
- Tax Lien Registry – Illinois.gov
- The Importance Of Property Manager Due Diligence – Forbes.com
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 Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott: Hey, everyone. Scott Hawksworth here with you, and welcome to another awesome episode of “The Multifamily Investor Podcast.” I’m really excited about today’s show because we’re going to be talking about tax liens, multifamily investing. And joining me to help offer his insights, and he’s gonna have a lot of them for us, is Jeff Piposar, who is the founder and managing partner of JA Piposar LLC. As I said, he’s got a lot of experience around this. So we’re really lucky to have him here. Jeff, welcome to the show.
Jeff: Hey, Scott. Thank you very much for having me. Certainly looking forward to the conversation and hopefully providing some value to your listeners out there. So thanks again for the invite.
Scott: Absolutely. Well, to kick things off, just to make sure we’re all on the same page with this, can you kind of break down for us what are tax liens and are these a way that investors can potentially invest in multifamily properties?
Jeff: Sure, and that’s a very good question. You know, I’ll start it off with, for those of you out there listening, oftentimes, when I’m at a cocktail party, or a networking event, or something like that, when you introduce yourself as a tax lien attorney, I would say 99.99% of people roll their eyes and find some excuse to go get another martini or something like that.
So if you’re out there, and you’re listening, and you start to have that initial reaction, I seriously beg you to stop really for just a few minutes and listen because, in my opinion, tax liens are one of the best and safest investments out there. And why do I say that at the beginning? I say that because where else does the state legislature dictate through law that an investor who purchases a tax certificate at an auction is guaranteed a rate of return somewhere between 8% and 15%? Where else in the world are you getting that?
Your best financial adviser on Wall Street, in Chicago, in L.A., London, wherever they may be, what do they always say? “Oh, we hope to get you 7% return annually.” Seven percent return. I just told you that you’re going to get a blended rate of 8% to 15%, and that’s guaranteed by a state legislature.
So for all of you out there who did start rolling your eyes when you hear the terms tax lien, I beg you to stay because I think it’s a wonderful investment. I’ve been working in the tax lien space for the better part of a decade now, both as an attorney, as Scott mentioned, managing partner of JA Piposar LLC, a boutique law firm that really frankly specializes in tax liens in Indiana in that process and what that process looks like.
But I also have a little bit of a unique point of view on tax sales because I’ve participated in them as an individual. I’ve purchased tax sale properties in Illinois. I’ve purchased tax sale properties from other companies that have purchased them in Illinois. And a really good friend of mine runs one of the top five largest private tax lien funds in the United States, and I am an investor in his company as well.
So as you can see, a large part of my time, and frankly, a lot of my hard earned money is put right back into this world because I think it is very powerful. So, Scott, I hope you don’t mind that I diverted there for that moment, but I did want to emphasize that this is a really great investment if you understand it. And that’s really, really important.
Scott: Yeah, and you’re practicing what you preach too, which is, I think, always a key thing. You aren’t just out there saying, “Oh, hey, go do this. This is a great investment.” You’re saying, “I’m actually doing this. It’s a great investment.” So I’m curious then, Jeff, so you broke down so well what tax liens are and why it’s so exciting. But can you kind of tease it out a bit more and how maybe it might connect to multifamily?
Jeff: Yeah, absolutely. So let’s start very basic, and we’ll very quickly get into your question, Scott, about can you invest in multifamily. The answer to that is yes, and I’ll get into that in a moment.
Jeff: But tax liens for those of you out there who don’t know what they are very simply, each year you owe property taxes, right? Taxes and death, two guarantees in life. If you don’t pay your property taxes, about 30 to 35 states authorize a certain type of tax auction or tax lien auction, and it can take a bunch of different forms depending on the states. And we won’t get that granular in this conversation.
But let’s just say that Illinois and Indiana where I’m based, where Scott is based, where probably a lot of folks are based, they allow these types of sales. So what happens is if you do not pay your property taxes after a set period of time, the county in which that property is located will put your property up for auction to investors, and investors, whether they’re local or national or even international, and I’ve had people from Canada, from Europe, from Israel, from the Caribbean, I’ve had all these people as clients coming into Indiana, of all places, they come in, and they bid on these properties.
If you win the bid at that auction, you are given what’s called a tax certificate. That certificate represents a lien on the property. And if you go through these specific legal steps that are outlined in that state legislature and you perfect that certificate, you will get a tax deed. Now, what is great about getting this tax deed? One, your bid price is going to be pennies on the dollar for what the value of that property is.
So that’s important to understand right there, is you’re getting something for pennies on the dollar. But then what’s really powerful is you just eliminated all the liens that were on that property. So Bank of America had a $500,000 mortgage, that’s wiped. There were five different judgments on the owner that attached that property, those are wiped. All of these judgments, all of these liens are wiped. You get the property free and clear. So not only did you have it as pennies on the dollar, now you have it free and clear.
And if, for some reason, the property owner during a period of time called the redemption period where they’re allowed to come back and pay the back taxes and receive, keep their property, if they do that, they have to pay you your bid, they have to pay you penalties, they have to pay you interest, they have to pay your attorney’s fees, they have to pay your title search fees.
That’s why I said at the beginning you’re going to get a blended rate of return in a state like Indiana of somewhere between 8% and 15% depending on those factors, depending on some timing. So to put that bluntly, you don’t pay your taxes, an investor comes in, purchases a lien on the property. If the property owner comes and pays everything back, you get a rate of return between 8% and 15% in a year, and that’s pretty darn good. If they don’t pay it back, you’re getting a property free and clear for pennies on the dollar. That’s what tax sales and tax liens are.
So, nobody taught you about that, right? I mean, it’s something that is out there. And you literally have everybody from a single-family mom to larger funds and corporations playing in this space. So it’s a space that’s ripe for anybody on this podcast because I’m assuming people on this podcast are rather educated.
You have the ability to go into these states and play in this game. And it’s a really powerful game if you do your research and you understand what you’re doing. Now, Scott, to your question and probably what people are wondering on here, can I get multifamily? Yes. You know, each year, so I’ll give you an example. And, again, a lot of my examples are going to be Indiana-based because that’s where my law firm has been for the past decade.
Lake County, which is the county closest to Chicago, so I can go from Lake County and be in Downtown Chicago in 30 minutes. For those of you unfamiliar with the geography given traffic, we’ll put that caveat out there, 30 minutes. Well, that location has Gary, Indiana, but it also has a number of very nice suburban-type communities. So you can get everything from a rundown shack to an old warehouse to almost a mansion if people didn’t pay their taxes. So each year there’s about anywhere between 15,000 and 17,000 properties up for auction. Those properties can be vacant land, single-family homes, commercial buildings, apartment buildings, large mansions, single-family homes.
Now, for you guys on this podcast, the percentage of multifamily, of commercial are certainly going to be lower than, you know, vacant land and single-family homes. However, they’re there every year. Some of the stories I have of clients of mine, one client bought a cemetery one time, one client realized that a country club didn’t realize that their swimming pool was on another tax parcel and didn’t pay the taxes on it. So he bought the swimming pool, or at least a lien on the swimming pool.
I have a client who over the past three years has bought up every old abandoned warehouse on Main Street in Gary, Indiana, is a 20,000 square foot warehouse. She’s a civil engineer. She helped build the original World Trade Center. She’s gone in, and she has rebuilt all of these warehouses. And these warehouses are now distribution sites. They are co-working spaces. They are offices and warehouses for suppliers.
I have people who buy two to three-unit apartment buildings. Literally, my first client ever, I got in 2012, she came to me with one property. This woman over a period of years has bought up entire neighborhoods in Lake County. And what she does, she goes in, and she negotiates with the people who lost the house, and she said, “Well, I’ll let you live here for 800 bucks,” where she bought the lien for $1,500. So 800 bucks a month, you’re making $9,600 a year. She paid 1,400 bucks for the lean, 1,500 bucks for the lean, $2,000 for the lean. She’s bought up entire neighborhoods and has created a rental company around that specific thesis.
So there’s a ton of opportunity in tax sales. Multifamily is one of many different strategies that people come in and bring to this area. But honestly, Scott, I would say that the number of strategies are as diverse as the number of clients that I get any given year.
Scott: I mean, it’s incredible. And you’re talking about someone who, you know, bought a swimming pool, a country club, so clearly just a lot of different opportunities. And then that aspect of rehab and revitalizing and repurposing and doing these types of things can really make it an attractive prospect for investors. Can you share a bit more about your background and sort of how you got into all of this and really JA Piposar LLC and kind of where you, I guess, kind of fit and facilitate these types of things?
Jeff: Okay. Yeah. So for those of you on here who are maybe a little further on in your careers and a little bit more mature, this will probably bring a little bit more true for you. I always hated hearing this answer when I was younger in my 20s trying to figure out where to go in my professional career. But the older I get, the more I realized that opportunities are a combination of being prepared, obviously working hard, but also realizing when an opportunity pops up, even if it wasn’t an opportunity that indicates a road you thought you were going to go down.
The reason I say that is I got into tax sales because, frankly, of my roommate back in college. I went to Notre Dame. I flitted around the U.S. working for a couple of different corporations doing consulting, saw myself in Chicago doing compliance consulting. No offense to any of you on the phone or on the podcast listening who are compliance folks, but it’s not my jam.
I was pretty miserable. And I am just not a compliance person, even though my background is as an attorney. Compliance just doesn’t suit me. So I was looking for something else, and this is late 2011. I’m with my buddy who runs one of these large private tax lien funds, and I was like, “Okay, is there a job there for me? Can I do something with your company?” And he said, “No, you know, we don’t really have a spot for you right now. But I’ll tell you what, you know, go take the bar exam in Indiana,” because at that time I was barred in New York, “take the bar exam, open up a law office. I’ll teach you everything I know about tax sales.” Well, the thought of studying for two months straight, taking the bar and doing all this stuff didn’t really interest me. But I needed money for an engagement ring at the time for my current wife. So I was like, “This might be a good thing to do on the side.”
Scott: I love it.
Jeff: Well, that’s how opportunities pop up, right? It’s not necessarily seeing how clear the road is ahead of you out the past few years, but literally every success I’ve had over the past decade can be directly tied to saying yes at that bar grabbing a burger and a beer some random night in 2011. So I tell that story because oftentimes people listen to a podcast, they read a book, they listen to a friend, and they say, “That’s a great idea.” And then life gets in the way, and they turn around, and they forget about it. Don’t forget about it. Think about it for a little bit. Sorry, that was a long story, Scott. But because of that, I took the bar and started my office, and blah, blah, blah, I got the money for an engagement ring. And I thought this would be kind of something to do on the side, nights and weekends, whatever. And it just blew up.
It blew up because of a combination of me putting myself out there, introducing myself to different people, networking all across Chicago, and telling people what I did. And as you understand tax liens more and more, and you speak with people who are educated more and more, and they realize the opportunity, you see that there’s a ton of folks out there who really are searching for unique investment opportunities, and tax sales just happens to be one. And that really helped take off my business. And that led to me quitting compliance. It led to me doing this firm full time but also starting to dabble in other aspects of real estate in Chicago.
And so, in 2016, I was helping a small firm do acquisition work in multifamily in the south side and the west side of Chicago. Through that, I met one of their major investors, and he and I peeled off of that company and started our own company, LPL Residential LLC. That company bought up multi-families in the south side of Chicago and the west side of Chicago, and we did that for a number of years. We started divesting ourselves some of those assets a few years ago. We still have…we actually just have one 31-unit courtyard building left in the Marquette Park area, if anybody on here knows Chicago. And that turned into purchasing single-family homes on tax sales in Illinois, rehabbing them, flipping them, which introduced us to a whole nother slew of people, which led to LPL Residential really being a rehab and flip company.
And now it’s been another transition point where we have so many contractors that want to work with us or who have worked with us over the past seven years. And we have all these other folks who need contractors. So we’re kind of almost now finding ourselves to a point where do we just turn into a construction contracting company.
Scott: Are you a construction company now? Wow.
Jeff: Yeah, yeah, this conversation in a bar in 2011 led to a law firm, which led to investing in multifamily and single-family home rehab and now a construction company. And now I’m also located out in Utah, where I’m building spec homes in gated communities in Park City for the ultra-wealthy. So these are all different things that have happened over the past decade, but they’re all because of that conversation about tax sales, and tax sales has led us into all these different areas. So I know that’s a very long winded answer for you, but I hope that gives some background on to where we started, how we got to where we are, our expertise in all these different areas, and where we are today.
Scott: That’s a fascinating story and certainly proof in the pudding of following opportunities when they come up. I want to actually tease out a bit on your experience with multifamily in Chicago and otherwise in terms of the rehabilitation aspect and investing. Can you speak more to maybe some of the keys for success, what you kind of saw that you guys were doing really well that was really working just for folks listening?
Jeff: Sure. So I think there’s a few keys. The first key…and I don’t know if any of these are shocking to anybody on the podcast here, but I’ll tell you what we have learned. The first key, and this is in all aspects of real estate, you make your money on the buy. I mean, that’s really where you’re going to make your money. You’re making your money when you purchase a quality building for a good price. Is that right now given this environment? I think it depends. I don’t know necessarily if Chicago is the greatest place right now, but is a place like Utah or Arizona or Florida a better one? Maybe. I think it depends on what your strategy is and what you’re looking at. But the first rule is always you make your money on the buy.
The second one when it comes to multifamily in where if I could go back, this is what I would focus a heck of a lot more on. And that’s the fact that nobody is going to take care of your building as well as you are. Let me say that again. Nobody is going to care or take care of your building as much as you are. So if you have the ability that this is your full-time gig, and you are the manager of your building, and you’re running day-to-day ops, obviously with a team, but you’re kind of the head guy in charge, then great. You don’t have anything to worry about. When we were getting in the multifamily, we didn’t have that option. So there were three of us who were partners at LPL Residential. And our one partner is a bit older. He runs a number of other companies. He was more of the capital guy. And then there were two of us who were running the company, but we also had other gigs. I have my law firm. He was part of a tech company at the time, my other partner.
So we hired a management company that was actually a friend of ours. He did a lot of work with other people in Chicago that I knew. But the problem with him was he ran his own portfolio, and then he had as part of that a third-party company where he ran other people’s buildings. Well, it’s human nature, and you know where I’m going with this. If you have a fire at your building that you have an ownership of and a fire at Jeff Piposar’s building on the same day, where are you sending your best resources?
Scott: Yeah, you’re going to your building.
Jeff: You’re going to your building. If you have 50 different apartments that need rented out and Jeff has 50 different apartments that need rented out, where are the best tenants going? They’re probably going to make their way to your building. Whether it’s a conscious decision, a subconscious decision, you’re never going to get the best quality of management from a management company. And there’s a lot out there who own their own buildings and do third-party work. Your management company is so, so important. And what’s even better is if your management company has as a division a brokerage house, where they have brokers that are part of their company that only focus on getting tenants for clients of that company.
So this happened to us in Chicago. So, at first, we had this individual, and let’s call this individual Adam, obviously not his real name. And Adam is managing things, and it wasn’t really going well. They were okay for a while. And then I realized because I talked to the contractors all the time, and I was on site often… Even though it wasn’t my full-time job, I went to all of my properties often, another item that’s very important. And so I started learning the contractors, and I started learning about the janitors, and I started learning about the roach inspector, whomever else is part of this.
I realized that a lot of my buildings, the person that Adam put in charge didn’t show up for three months at a time, or four months at a time, or five months at a time. So when we’re getting our monthly finances and months are going by without a unit getting rented and income is dropping every month, we always got from Adam the excuse, “Well, you just bought poor buildings.” So over a period of time, I started looking more and more into this because I started not really believing Adam. I’m like, “The three of us are pretty smart…”
Scott: Right. “Were we that wrong?”
Jeff: Yeah. Like my capital partner literally took a company public back in the ’90s that at one point was a top 10 largest REIT in the United States. We’re not dumb. So I started looking into it. And it went to those relationships that I cultivated because I didn’t treat the contractors like a contractor, I treated them like a partner. I didn’t treat the janitors like a janitor, I treated them like a partner, you know, and you talk to them about what you’re doing with the building, and where you’re trying to go, and what you’re trying to achieve, and what are they trying to achieve? Where do they want to go with their contracting business? Does the janitor want to be a janitor? Does he want to go somewhere else?
No matter any of these businesses that you work in, it’s really all about understanding the people that work with you, not for you, with you. And if you treat people like partners, you’re going to get the information that you need to succeed. So all these people started coming to me. Well, Adam’s handpicked guy that’s supposed to be in charge of this building hasn’t shown up for four months. All right? So you start getting that information.
So I took that information, and then I went out, and I started interviewing larger management companies in Chicago that did not own their own buildings. And so we found one that a lot of brokers that I work with recommended, a lot of the top brokers in the city of Chicago, and I interviewed them, and I interviewed a number of the people that had worked with them, and they were in a lot of the areas that our buildings were.
So we fired Adam in his team and brought in this new company. So I’ll give you one example of a property I have in Marquette Park that we still have. When Adam was running that, the last year, we were hovering at 60% occupancy, and it dropped to 45%. And we kept hearing that it was our fault, we bought a bad building. Within 10 months of this new management company coming in, the property was up to 93% occupancy. And of that 93% occupancy, every single unit they filled was a subsidy tenant.
If you’re listening and you don’t understand how important subsidy tenants are when you’re in lower income areas of the city, they can make or break your building. A subsidy tenant, they do not pay rent directly from their bank account to you. They have some other third-party that pays their rent. Whether it’s the Chicago Housing Authority or Chicago…a religious organization, whatever it is, that organization, that corporation, that nonprofit, that is paying you.
So in the 1st of the month, you’re automatically getting that wired into your account. Market tenants, maybe you get the money on the 1st, maybe you get it on the 10th, maybe you get it on the 25th, maybe there’s an excuse, maybe you get it four months later. If you’re in Chicago, you know how hard that is. And then if you want to evict them, heck with COVID, I’ve had somebody in this property we’ve wanted to evict a year and a half ago, and we haven’t been able to because of COVID because there was a moratorium on evictions.
Now, if you go across the border to my law firm in Indiana, someone’s out in two weeks. Some people might find that callous, but I’m sorry, but you’re running a business here. It’s not a nonprofit. So you have to watch out where your buildings are located. Are you in Chicago? Are you in New York? Are you in Baltimore? Take that into account.
But are you in Florida, Indiana, Kentucky, Arizona, Utah? Depending on what state you are in and whether it leans red or it leans blue, not to be political, but some are easier to deal with than others. And you have to understand that, and you have to realize that, and that’s an important item to take into consideration when you’re calculating your models on multifamily, and your vacancies, and how hard it is to get rid of somebody.
So that’s kind of what we’ve learned, Scott, in our space. If you’re not managing yourself, the management company is of utmost importance. Our building skyrocketed once we got rid of Adam and his team and put this new team in. And we’ve never looked back. Our only regret is we didn’t do it earlier.
Scott: It’s such a fantastic lesson. And I think it ties into something that’s so key, is this idea of incentives. And are the people you’re working with, are the incentives aligned? Is there something that may be off there? And when there is, then you can kind of run into some trouble, and it seems like you kind of learned that the hard way with that situation, right?
Jeff: Yeah, it is. And, you know, now we sit here and we debate do we want to do rentals again, right? Because we have this building left. But most of our other stuff is rehab, respect builds, or things like that. And I always told my partners, I said, “I would get back into rentals, but the lessee has to have skin in the game,” right? What do I mean by that? We were in all these lower income areas. Well, those folks, it’s horrible to say, but they really don’t have anything to lose, right? If any eviction goes on their record or their credit score suffers, they don’t care. They go over to the next building. You know, and it happens again. You need people with skin in the game.
Now, if you’re talking about, let’s just say you’re up in Arlington Heights, to give a Chicago example, and you have two young professionals who are renting, they’re thinking of buying a home in a year or two, and they’re saving up, but they aren’t paying their rent, well, the threat of an eviction can destroy their future goals, right? They have skin in the game. They need to pay that rent. So whether the skin in the game takes that specific example or something else, again, we’re running a business.
And I know some of the things I say sound callous, mean them that way. But it’s the truth of the matter. If you don’t have a great management company, then don’t go into a lower income area. If you don’t understand how that area works, I would triple-check your models to make sure you can make it down there. The management company helped us make it down there. But if you don’t have that, it’s really, really tough. And so that’s a question that we always discuss internally, is do we want to do rentals again? If so, where would we go?
Scott: I think that’s such sound advice and a sound way to look at it because it is a business, it is an investment. And so that’s just so important to kind of consider those aspects of it. Jeff, we’re running low on time here. I wanted to thank you so much for joining me and sharing so many different insights from everything to tax liens and then multifamily there and your experiences. If folks listening want to connect with you, find out more maybe about how they could work with JA Piposar LLC, where can they do that? Where can they connect with you?
Jeff: Yeah, Scott. Thanks for the opportunity to provide my information. So two different ways, email and phone. Email is [email protected] That is [email protected] And my phone number, 412-527-1548. That’s 412-527-1548. Either of those are great ways to get in touch, and I’m happy to speak with any of your listeners if they have questions about tax liens, multifamily investing, investing in the Chicagoland, Indiana area, or investing in the Utah area. Happy to help with any of those.
Scott: Fantastic. And we’ll, of course, have links in the show notes and all of that good stuff. Thanks again, Jeff.
Jeff: You’re really welcome, Scott. Thank you