Tax Lien Certificates are an interesting vehicle, but there's a lot of details involved.

 

Not all states offer them.

the way they work is pretty interesting- counties who assess property tax get some property owners who don't  pay their tax.  What the county does in order to secure the debt is to attach an encubrence, a lein, on the title of the property.  The lein is essentially an interest-bearing note, a second mortgage of sorts.  After a certain amount of time in default, the holder of the lein is entitled to foreclose on the property.

 

The problem is that the default period takes time, and the counties need the money now to fill their budgets... so what they do is allow investors to buy the lein.  As the Lienholder, you are entitled to collect the interest on the debt, and the interest rates can be substantial.

 

...but here's where it gets interesting.

Some counties will auction off the lein to the investor willing to accept the lowest rate of return.  Some counties will auction off the lein to whomever will pay them the most money on top of the taxpayer's debt.  If, for example, you buy a Lein Certificate in CO for the taxpayer's debt plus a couple thousand dollars *and* the taxpayer redeems the property the next day, you lose money.  If you buy a Lein Certificate in another state where the auction is competitive, you may be buying a note with fairly low interest and now your money is tied up in a low-yield instrument for as long as it takes for the landowner to redeem the property, or until you forclose.

Before investing in a Lein Cert you have to know where your 'line of profit' stands- how long will the Lein need to be outstanding before you make a profit, if you're in a state like CO?  How low a rate can you accept if the bidding at the auction is competitive?  How long can you stand to have your money tied up in the Lein?

 

If you buy a Lein Certificate on a property that's worthless, or worse, has industrial waste on it, you stand to be the owner of a liability, rather than an asset- so if you're interested in doing this, make sure you approach it as a real-estate transaction.  The lein's potential value is tied to the value of the property it's attached to.  If it's swampland, if it's undeveloped, if it's industrial, you have to know why before you invest.  If it's residential, this is good- chances are that it'll be redeemed and you'll get your money, or if they default chances are good that the property is valuable.

 

Tax Liens are only as risky as bonds and real estate combined... and that's saying something.  Make sure you know what you're getting into.  If you're serious, you'll have to put some work into this- investigate the property records, run a title search, if you can, visit the property or have it inspected by someone knowledgeable.  ...of course, keep in mind that the current tenants might not appreciate it.

 

Keep also in mind that if the taxpayer defaults, you've got to serve papers and take legal action fairly promptly to take possession- and this can be a ruthless move.  If they stay on the property in some states, they can claim ownership by virtue of 'adverse tenancy'.  If you're not prepared to exercise your rights, and to spend a little money on legal advice, service, and also to pay the property taxes on the property you now own... you will lose your investment.

 

so- there's a LOT of information to be on top of, there are expenses involved above and beyond your investment, there are cases where you won't make money on your investment, and if all that sounds like too much work and risk... well, maybe it isn't for you.  That said, occasionally you'll get 16% or more out of your money for as long as the Lein is outstanding... and in really rare situations, you may end up owning a property worth 1000% of what you invested.  Most of the time, however, rates are lower than that and properties are redeemed within a year.