Homeowners across Baltimore are scrambling to respond to a threatening letter they received last month: If they don’t pay their past-due property taxes, the letters said, their tax debt could be sold at the city’s annual tax lien sale. That could cost them potentially thousands of dollars in additional fees and interest, or even their homes.

To a small handful of investors and attorneys, those letters say something different: the start of the busy season.

While 534 companies have won a slice of the tens of millions of dollars generated for private investors through the tax sale since 2016, just 10 companies acquired the lion’s share of the properties foreclosed on through tax sale and most of the profits, a Baltimore Banner analysis of city finance department data found. These 10 companies each took title to more than 30 homes during that time, acquiring 73% of all homes and 60% of the total revenue, with each company generating at least $1 million over the last six years.

The tax sale system, which is governed by a state law dating back decades, operates in some form across Maryland. But the cottage industry that has formed around it is strongest in the city of Baltimore. High property tax rates in the city make homeowners particularly vulnerable to falling behind on taxes, and many neighborhoods are plagued by distressed housing that is attractive to investors looking to buy cheap and flip. Some 41,000 properties have gone through the city’s tax sale since 2016.

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Most affected homes are located in Black neighborhoods, a previous Baltimore Banner analysis found. In some of those neighborhoods, more than 40% of all buildings have gone to tax sale since 2016.

For a small group of investors, the neighborhoods have become the center of a robust business, with entire subsidiaries of companies dedicated to tax lien investing. Tax sale cases also generate the majority of business for a handful of Maryland attorneys, who can charge up to $2,500 in fees from a homeowner once a home is foreclosed on and $750 prior to foreclosure.

City finance officials have defended the system, arguing that tax sales are a necessary revenue collection tool for a city that struggles with shortfalls. However, revenue from the tax sale is nominal; it generates $10 million to $20 million a year, representing 0.5% to 1% of the city’s budget, according to Carla Nealy, chief of the city’s Bureau of Revenue Collections. Critics argue that those earnings are outweighed by the costs that the city incurs when homes with liens that were sold in tax sale sit vacant for years on end.

As advocates and city leaders push to reform a system they describe as predatory, investors and their attorneys have rallied to its defense, appearing regularly at the Maryland State House to fight policy changes, even opposing legislation introduced on behalf of the mayor’s office.

“It’s not like the city is doing this and profiting from it,” said Claudia Wilson Randall, executive director of the Community Development Network of Maryland, who serves on a tax sale work group convened by Mayor Brandon Scott to propose reforms to the system. “They’re helping third parties gain from it.”

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‘Bubble 2.0′

Rising home values in recent years have boosted those gains. Prominent Baltimore tax sale attorney Scott Morse calls it “Bubble 2.0.”

“The values of these properties have just skyrocketed in these rougher neighborhoods, where they do a lot of buying,” said Morse. Earlier periods of sluggish housing markets and high rehab costs after the 2008 recession and in the mid-2010s made tax liens a riskier investment, he said, but “you look like a genius if you’ve been in it for the last three years.”

Certificate purchasers have generated a total of $27 million buying and flipping houses in Baltimore since 2016, based on a Banner review of the sale prices of tax sale properties at auctions and in subsequent sales. Investors interviewed by The Banner contend that these figures do not account for costs incurred in the flipping process, like rehab and past-due water bills.

Investors earned roughly another $10 million in interest payments from the majority of owners who “redeemed” their properties after tax sale, who incurred interest rates of 12% for owner occupants and 18% for non-owner-occupants.

More risk, more reward

Prominent tax sale investors describe the industry as a specialized market that can be profitable once mastered.

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“There’s a lot of gurus on the internet saying how easy this is, it’s profitable, it’s risk free — none of which is true,” said Ned Carey, one of the city’s most prolific tax lien purchasers. But, he said, “the higher the risk, the higher the potential return.”

Carey, who is represented by Morse, got his start in tax sale investing in the early 2000s when he learned about the opportunity at a weekly class on real estate investing. He started with two properties near Patterson Park, purchasing the liens for cheap, foreclosing on the homes and flipping them into rentals. Carey, then working as a bicycle sales representative, was hooked.

Twenty years later, Carey’s business has ballooned. The annual release of the list of properties eligible for tax sale sets him and his team on a weeks-long tour of Baltimore’s most distressed neighborhoods to identify between 2,000 and 3,000 worth bidding on.

“In Baltimore City, there might be two, three or four on the same block. You drive down the street slowly and look at the general condition. Is it boarded up? Does it have windows? Are the windows new? Are they old wood windows?” Carey said in an interview for the investing podcast “Creating Wealth Simplified.” Typically, Carey’s team wins between 500 and 1,000. Some owners pay his group back, with interest, before it can foreclose, leaving the company with around 10% of the homes it bids on each year, Carey estimated on the podcast.

From there, Carey will typically “wholesale” them, or auction the properties off en masse, often to investors.

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“It’s a very socially responsible way to invest,” Carey told The Banner. “I’m helping the government collect funds that they’re not otherwise collecting and I’m part of the process of getting things back on the tax rolls and back into good condition. And I can profit from it, so I look at that as a very positive thing.”

Other tax lien investors employ a different strategy, targeting higher-value properties that homeowners are more likely to redeem, and collecting exorbitant interest when they do.

Aaron Naiman, a prominent tax sale attorney, describes those investors as “your typical investors — people who just want to park their money somewhere relatively safe.” That they may end up with a house out of it is just a bonus, he said.

One company that has mastered the strategy is Municipal Investments LLC, which has generated nearly $1 million in revenue since 2016, 80% of which has come from the interest collected when homeowners pay off their liens to prevent or halt foreclosure. More than 30% of those payments come from homes classified by the city as being occupied by homeowners themselves, as opposed to homes owned by landlords or investors. No other firm of its size collected as much in interest payments from owner-occupants during those years. The company’s attorney, Heidi Kenny, who serves on the mayor’s tax sale workgroup, did not respond to a request for comment.

“They know there is someone in that house who is more likely to pay the redemption cost because that’s the only place they have to live,” said Margaret Henn, an attorney with the Maryland Volunteer Lawyers Service who represents clients facing tax sale. “They know that people are up against a wall.”

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Deborah Ellison realized that it was too late to save her brick West Baltimore row home from tax sale foreclosure in January when two young women arrived at her door. They were considering buying the property from an investment company, Maple TSF, which had purchased a $3,500 lien on her property for unpaid taxes in 2017.

Ellison remembers getting the notice and paying the bill. But something must have gone wrong — maybe she paid the wrong bill by accident, she’s not sure — and the company proceeded with the foreclosure.

Deborah Ellison poses for a portrait inside her home in Baltimore, Feb. 28, 2023. (Jessica Gallagher/The Baltimore Banner)

Earlier this month, Ellison learned that the company had found a buyer, who filed a case in District Court to have her removed from the property. Ellison, who’s been living in the house since 1994 when her mother bought the home, the first person in her family to do so, may have just weeks to find somewhere else to go. In an email to The Banner, attorney Neil Eskin said that his office provided extensions, offered payment plans, and spoke to the city before pursuing the foreclosure.

“You work all your life and think something belongs to you and then you look around and out of the clear blue sky, someone buys it right up from under you for a couple thousand dollars,” said Ellison. “Something that you paid 30 years of your hard-earned money to belong to you, and lose it like that.”

“But I’m sure I’m not the only one,” she said.

A web of investors

The corporate structure of the largest investors is as complicated as the tax sale process itself: Behind each of the 10 largest purchasers is a messy web of subsidiaries, with some investment companies containing more than 10 corporate entities.

One of the only clues that roughly a dozen tax sale investment companies active in the last six years in Baltimore are connected is their shared letters: Ande Investments LLC, Ande Properties LLC, Dean Investments LLC, Dean Properties LLC, Dane Equities LLC. They also share a common address: a strip-mall style building on Hooks Lane that’s home to the office of tax sale attorneys Aaron and Eleanor Naiman, two of a handful of attorneys who handle the bulk of tax sale cases in Baltimore.

Altogether, companies represented by the couple have generated $3 million through tax sales since 2016, with most coming from flipping homes. Some companies represented by Naiman have sold homes for six times their purchase price on average. Naiman argued that after rehab costs and additional bills, his clients’ profits are far less than substantial than that.

While many of the biggest players in Baltimore’s tax sale are locally based, the profits from their purchases ripple out far beyond Maryland.

The most profitable player in Baltimore’s tax sale is Stonefield Investments, a national investment fund run by the New Jersey-based retirement plan Broad Financial. The company has financed purchases of liens that generated a total of $6 million through flipping and $1 million from interest since 2016.

In 2021, the fund, which generates revenue for its investors from tax sales across the country, managed $70 million for just 60 high-net-worth investors, according to court records.

As the largest local profiteers have seen their profits come under threat in recent months thanks to a concerted effort by Mayor Scott’s administration and the state legislature to reform the tax sale system, the group has rallied to their industry’s defense.

Several bills to reform the tax sale system before the General Assembly this session were passed intact by the House of Delegates in March. But the most sweeping, and hotly contested, bill — which would allow the mayor to cancel Baltimore’s tax sale entirely — appears on the verge of collapse.

At a Senate hearing in early March, investors shared testimony blasting the bill as harmful to the city’s revenue collections system and requesting an amendment to the bill to limit the legislation to apply to homeowner-occupied properties only.

The next week, state Sen. Cory McCray introduced an amendment that would do just that, arguing that he doesn’t think the city is equipped to handle all of the blighted properties with past-due taxes on its own and that it should focus on protecting homeowners from the tax sale system.

The legislation will likely be finalized and voted on before the end of the legislative session on April 10.

“It comes to a point where it’s like, who are you listening to?” said Dan Ellis, executive director of Neighborhood Housing Services of Baltimore. “The people who are experts and working for the community, or the people who make millions dollars off the system? That’s the choice.”