By RAY A. SMITH
Staff Reporter of The Wall Street Journal

From The Wall Street Journal Online

Paying someone's property taxes doesn't exactly sound like a potentially profitable way to invest in real estate. But that's exactly what some investors are doing.

It's a strategy known as buying tax liens, or tax-lien certificates. The liens are legal claims on commercial and residential properties whose owners failed to pay property taxes. They are sold in auctions or tax sales by counties, municipalities and government agencies.

Buyers of these liens are basically paying the property owners' delinquent -- and at times the next year's -- taxes for them. The property owner then pays the county or municipality the overdue taxes, plus penalties and interest over a set period of time. The county or municipality, in turn, forwards that money to the investor.

If the owner pays the overdue taxes, penalties and interest within the time specified -- generally anywhere from one to five years -- he or she can keep the property. If not, the investor can take possession of the real estate without having to spend anymore than just transaction and legal fees.

Tax-lien sales aren't new. But some planners say they are timely now, in part, because property taxes have risen so much, making it harder for some owners to keep up with payments. Also, it's a way to get high yields while rates for other instruments are still low.

Indeed, some investors and financial planners say that tax certificates could pay anywhere from 10% to 30% interest, so they can be a profitable way for investors to earn income from real estate without actually owning it. Other investors buy tax liens as a way to obtain properties or land on the cheap by betting that the owner won't pay the taxes, therefore forfeiting his or her rights to the property.

While the tax-lien method can offer investors the potential for high returns, there are some risks. For starters, for investors looking to simply buy certificates and not eventually take possession of a property, there's no guarantee that a property owner will pay the already-delinquent taxes and other charges. What's more, unpaid taxes also could be a sign that the owner didn't think the property was worth paying taxes on because it was in poor shape or had a lot of problems. So investors could end up possessing a troubled property.

Also, investors need to check their state's laws on tax-lien sales. Depending on what state you're investing in, returns might not be immediate. Property owners have varying ranges of time in which they have to pay the taxes plus interest before losing the property.

"Your money will be tied up," says Thomas J. Lucier, chief executive officer of Home Equities Corp., a Tampa, Fla.-based real-estate firm. "You're so strung out time-wise. It can take years before you get your money back" plus interest.

There also is a downside for investors hoping that buying a tax lien is the first step toward eventually acquiring the property. For one, it can take years to finally get the title in your name, according to John Beauston, managing partner, and a certified public accountant with Moore Kirkland & Beauston LLP, in West Columbia, S.C.

Also, legal fees could eat into your profit since "there could be other liens [from the Internal Revenue Service or sales-tax liens] on the property that have to be legally removed," says Mr. Beauston.