Q: Do you know anything about buying tax liens? My friend says that she has been doing it for years and earning as much as 15% on the money that she has "invested."

A: What a timely question! The Larimer County tax lien sale is set to be held on November 20th. But before you participate, you need to consider a number of factors.

If an owner fails to pay property taxes, the county will sell the "lien," thus obtaining the money immediately while the purchaser earns interest on the amount paid to the county. Yes, in the past the rate of interest has been as high as 15%, but this year the rate will be 10%.

After the tax certificate has been purchased at the tax lien sale, it could be paid off by the property owner within a day or two, or the amount may not be paid for years. Thus there is no guarantee how long the money will be drawing that interest. Theoretically after three years for real estate and mineral rights, a certificate holder can go through the process to obtain a "Sheriff's Deed," which makes the tax certificate holder the legal owner of the property by just paying the taxes for those three years plus the cost of getting the deed.

Almost no property is ever obtained this way because, for example, the mortgage company will step forward and pay off the amount to avoid losing its lien on the property. Or someone will cut a deal with the owner, pay off the certificate, and obtain part or all of the property at a discount.

It is possible to commit as little as a couple hundred dollars or, on the other hand, many thousand of dollars, depending on the amount of property taxes owed. It just depends on what property is next on the list when it is your turn to take or to reject the next available property. (With rotation bidding, you decide on the parcel next on the list only when it is your turn.)

Even though many counties try to screen properties, this is a "buyer beware" type of process.

Many experienced tax lien sale attendees have their own guidelines on properties to avoid. For example, many will automatically pass on anything labeled "tract" because it might be too small for a building permit or not large enough for things like a leach field. The term "tract" might also suggest an oddly shaped lot or access problems. Often, the existence of other liens raises red flags, especially if the lien is on a property that was sold at a prior tax lien sale and the owner of that lien did not elect to pay the lien this time around (past purchasers have priority to buy the current lien before the sale). Additionally, bidders often have a rule not to bid on mobile homes or on mineral rights.

Successful bidders have found that they purchased a certificate involving property with environmental problems (the cost of cleanup exceeding the property's value), or a building in such a rundown condition that fix-up costs would make it a money pit, or that the property had been seized by the government for illegal activity, all of which means the money spent to obtain the lien may never be paid back, or securing title to that property would not make economic sense.

Buyers also have discovered ownership of a property was clouded because of ownership disputes or adverse possession claims. And although the lien might take priority, the holders didn't want to get pulled into the dispute.

After the sale is over, the wise participants will examine their properties to see if there are problems. Some investors have had to walk away from thousands of invested dollars because, after seeing the actual properties, they did not want to put anymore money into the property by picking up the next lien or take title to the property when they became eligible to apply for the deed.

I do not want to discourage you, and yes, the vast majority of buyers have never had a problem, but you need to understand that even here buying a parcel in a poke carries possible risks.