State auctions for property tax liens have been heating up lately, due to the emergence of hedge funds seeking to profit from homeowners who are delinquent on their property taxes.

More than half the states offer tax lien auctions where buyers can bid. The winner of the bid immediately pays the debt to the municipality before collecting back taxes, plus interest, from the delinquent homeowner.

According to Fortune magazine, one investor likened the buying frenzy by hedge funds as being “reminiscent of junk bonds.” The attraction for investors: the yield on these particular investments typically ranges from 2.5 percent to 10 percent.

Aided by banks willing to extend low-interest credit to buy the liens, Fortune reports that insiders estimate hedge fund buyers comprise 40 percent of the market, compared with 5 percent five years ago. Fortress Investment Group is named as the leading buyer in recent auctions. “We like the investment from a risk-return standpoint,” a Fortress director told Fortune. Another firm, BlackRock, expects net revenues from the investment in tax liens of $242 million over five years, according to a securities filing.

Although the delinquent homeowner is on the hook for past taxes plus interest if he wants to keep his property, defenders of the auction say having investors immediately pay the property taxes provides much-needed revenue to cash-strapped municipalities.

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