You've been reading about it, listening to late-night shows and hearing about your friends making the jump into real estate investing. But you just can't bring yourself to taking the plunge into owning property, collecting rent, taking repair calls and possibly having a renter who won't pay the rent or take care of your property.

Never fear -- tax liens are here. For those who want a more conservative, methodical approach to real estate investing, you may want to consider one of the least risky ways to invest in real estate.

TaxLiens.com reports that "$7.6 billion dollars in delinquent property taxes are created each year with total size of the market at any given time being in the $20 billion dollar range. There are 566 municipalities that sell municipal liens in New Jersey alone."

About 31 states issue tax liens, and the industry is growing at a rate of 8 to 12 percent per year, according to the Florida-based web site.

If you decide to pursue this investment option, be sure to conduct due diligence in your research. I appreciate the TaxLiens.com website's approach in that they do not promise extraordinary returns, such as 100, 500, or 1,000 percent on investor money, rather it points out that research and investigation are necessary to make the desired returns.

"Tax lien investing should be looked at as a modest return, lower risk investment. Goals should be set between 10 and 15 percent as a net return each year," according to the site, and it provides those who are skittish about the traditional method of real estate investing to take on a partner with the local government to create more than average gains on your money.

Tax liens can be purchased for as little as a few hundred dollars to tens of thousands of dollars. A simple explanation would be that you're paying someone else's taxes today while the issuing municipality (city or county) is pursuing payment from the landowner. Once they get their tax dollars, then they pay off the investor with interest. Keep in mind that about 98 percent of tax liens will indeed be redeemed by the property owners -- that means that most tax lien investors are going for the return of 10 to 15 percent net return on their money, rather than the hope of foreclosing on the property (which happens, as well, just not as often as you would think).

The internet has plenty of sites that deal with the practice and process of investing in tax liens. Your first move would be to go to one that lists what states actually issue tax liens, then drill down from there. What you're seeking are the local contacts you'll need to pursue the tax lien purchases (which are generally sold at a live auction), says Brian Lee, creator and webmaster of TaxLiens.com. His company, Iron Clad Realty Services, is a professional services firm, that has purchased more than $23 million in tax liens, in six states, for its institutional investors, as well as completed more than $6 million in acquisitions in the secondary market for clients.

"Your best contact, to pursue tax liens, is the local tax collectors' office," he says, adding that the search for the tax liens is only the first step in acquiring this type of investment. Once an investor acquires a tax lien, then there is a redemption period where the jurisdiction allows property owners to eventually pay their back taxes -- that redemption period can run up to two years in some states.

If the property owner doesn't redeem the lien, then the process moves into the tax deed sale stage. (Reminder: the majority of tax liens get paid.) It is at this time that the foreclosure proceedings can begin and the tax lien holder can take possession of the property. Every state has different rules and regulations, thus research is key. Other web sites for research include:

TaxSaleList.com: More than 5,000 tax sale lists published, both deed sales and lien sales.
Tax Title Services, Inc.: Helps tax deed purchases get clear title and insurance for properties acquired through tax deed sales.

Published: April 1, 2005