From the March 2008 issue of Entrepreneur

In the yin-yang world of real estate tax liens, a homeowner's property tax grievance may become an investor's fortune. In 1997, Tom Green bought seven tax liens for a total of $2,700 with a 14 percent annual interest rate. All were redeemed within two years and the gains helped put him through school. Now, 11 years and more than 1,000 tax liens later, 48-year-old Green, owner of Accel Home Buyers Inc. in Boulder, Colorado, says lien investments are contributing to his retirement.

Insiders say tax liens are booming in several states as more homeowners miss payments. At last year's tax lien auction in Larimer County, Colorado, investors snagged more than 2,000 liens in less than five hours. Says Green (mrtaxlien.com) , who bought more than a dozen liens there, "I've found over the years that when somebody doesn't pay their mortgage, they're typically not paying their taxes, too."

Caveat emptor: Tax liens are hardly a "get rich quick" strategy or a chance to score a home in foreclosure, despite what many infomercials preach. "There's so much hype it's nauseating," says attorney and tax lien investor Larry Loftis, author of Profit by Investing in Real Estate Tax Liens. So do your own due diligence and focus on getting the best return.

The Drill
Counties usually sell tax lien certificates on delinquent property taxes in auctions. In some cases, investors bid up premiums to win lien certificates. Other times, they bid down interest rates. Auctions are increasingly held online as well. Not all states issue lien certificates on past-due property taxes. Some, like Alaska and North Carolina, auction property deeds. Rogue Investor (rogueinvestor.com) has a free database of state auction procedures, including interest rates and redemption periods. Investors can also visit county treasurers' websites for rules and to track previous sales. The rate on a tax lien typically ranges from 12 percent to 18 percent, depending on the state, but it's only earned when the homeowner (or the mortgage lender) pays off the tax, which takes two years on average, according to Michael Williams, co-founder of Rogue Investor.

Because liens take precedence over mortgages, being delinquent beyond a state's redemption period may lead to tax lien foreclosure. In that rare case, the tax lien owner can end up with the home by following the state's procedures. Says Dolf de Roos, author of Real Estate Riches, "Most [property owners] end up paying the debt and interest, or the bank pays it off because they want to retain the mortgage."

Timing Matters
If the tax is redeemed too soon, investors can lose out. Interest rates accrue every month in some states. So, if the tax is redeemed in the first month, the earned interest may not surpass the premium paid to buy the lien. Say an investor paid an $80 premium to buy a $1,000 tax lien with 15 percent annual interest, for $1,080 total. If the taxpayer ends up redeeming in the first month, the investor would only earn back the principal plus one-twelfth of the 15 percent interest, or $1,012.50. To offset losses, Williams urges "buying a lot of these and turning them over. You want to play the odds."

Also, you should attend the entire auction. "People with deep pockets may buy $500,000 worth of tax liens in the first few hours and then [leave]," says Boulder County Treasurer Bob Hullinghorst. "You might get a break there."

Farnoosh Torabi is a correspondent for TheStreet.com TV.