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.

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