Differences Between Tax Liens and Tax Deeds

I often hear people talk about tax liens and tax deeds.  As they talk, they often get the two confused with one another.  In this article, I would like to lesson some of the confusion that takes place when discussing these two investment instruments.  We are going to take a look at the differences between a lien and a deed. Here are some of those differences:

  1. In general, a tax lien occurs when an individual does not pay property taxes on time.  When this occurs, the county where the property is located generates a tax lien certificate.  The county will then offer these certificates at an auction or over-the-counter. (Over-the-counter is when you buy the lien directly from the county.) The redemption period on these certificates ranges from six months to three years. (The redemption period is the period of time in which the owner of the property must pay off the investor.)  The interest rate ranges from 12% to 18%.  A lien does not result in ownership of the property.

The county generates the deeds after a period of time when the property taxes are not paid. Depending on the state, there will be an auction to buy the property.  In most deed states, the winning bid will result in ownership of the property.  Typically, no interest is paid on a deed.  Ownership of the property is the result of being the highest bidder at the deed auction. 

  1. When purchasing a tax lien certificate, you may be able to reserve the certificate with as little as two dollars.  You can often reserve a lien for a short period until you pay the county in full.  On a tax deed, your payment will be required almost immediately.  Like most auctions, you will have a short time to pay for the tax deed.  Understand and know what your deadlines will be for payment before you participate in the auction. 
  2. Finally, know whether your state is a lien state, a deed state or a hybrid.   The states are evenly divided as lien or deed states.  Georgia and Florida are the only hybrid states.  Deed states, in general, operate using auctions.  Lien states tend to operate on an over-the-counter basis.  An investor will make money by understanding the how the different states sell liens and deeds.

Three Tips for Buying Tax Liens in Any State

Buying tax liens can be a very lucrative way to make income.  An investor can make 12% to 18% in states that sell liens.  Also, an investor can control their own investment without putting their money in the hands of another person.  However, understanding some strategies that will insure you have a profitable venture will make your investing easier. 

  1. When you buy a lien and fail to get paid within the redemption period you are going to need to foreclose in order to get paid.  Understanding what that foreclosure process will entail will help in your decision-making.  For example, will you need to hire an attorney to help you go through the foreclosure process?  If so what will his/her legal fees cost you?  Will you be able to recoup those fees when the judgment is rendered?  Knowing the answer to all of these questions, as well as understanding the process, will free you of a lot of stress and help make your investment profitable. 
  2. You need to know and understand what the redemption period is of the liens you are holding.  Redemption periods can go from six months to three years.  The redemption period is the time the homeowner has to pay you, the investor.  After the redemption period, you can proceed with a foreclosure. Each state will have a different period.  If you get involved with a lien deal, you are going to need to know how long it is going to take for you to get your investment to pay off.  There are secondary markets where you can get rid of a lien early, but you will usually pay a steep price to do so.  Having a good understanding of how long your money will be working for you is important.  You are going to want to know when you get paid.
  3. Understand the way you will buy your liens and collect your money when it’s due.  Will the county accept a personal check or require a credit card?  Will your money be mailed to you or will it be direct deposited to your bank account?  Will you be able to buy your liens using an LLC?  All of these things will be important as you move forward with your investing.  Understanding the correct way to pay and receive your money will go a long way in helping you succeed in your investing.  Understand the details and you will make the dollars.