Differences Between Tax Liens & Tax Deeds

Tax liens and deeds are among the most lucrative and safest investments you can make. Although profiting from tax liens or tax deed properties is not very difficult, it does require specialized knowledge of the trade's terminology and a familiarity with local procedures. While there are some comparable characteristics between the two, there are also differences.

Tax Liens

The government requires property owners to pay real estate taxes. A tax lien is an encumbrance placed on property or a vacant lot by a government agency when the property owner becomes delinquent and does not pay his or her property taxes. The liens on these properties are typically sold at county auctions to investors. Winning investors obtains a first lien position on the property. The property owner receives notification of the tax sale and must pay off the delinquent taxes and any interest and penalties that are accrued. The owner must reclaim his or her property within a specified period of time. This is often called the redemption period.

Tax Deeds

In tax deed states, the government places a lien on the property or vacant parcel for non-payment of taxes just as it would for a tax lien. The winning investor is awarded full legal ownership of the property. In most states, the delinquent taxes and other financial encumbrances are voided. In a few states, the liens are not extinguished; therefore, the winning investor is responsible for paying off any obligations due in order to get a clean title to the property. It is important to do your homework to become knowledgeable about the requirements in your state. Tax deed investors also must conduct due diligence before the tax auction to ensure that they are not bidding on an undesirable piece of property.

Key Difference

Most tax lien investors are not looking to own real estate. In fact, many cringe at the idea. They are in the business of earning hefty interest plus costs the owner must pay to redeem his or her property. In contrast, tax deed investors profit from the equity difference between what they paid to receive the deed to the property and its actual market value. The most money can be made in tax deeds because of the "pretty good equity split" that investors can realize, according to Darius M. Barazandeh, attorney and investment expert. Also, tax deeds can be riskier investments compared to liens because of the potential to end up with a property that has other encumbrances or limited market value.

Hybrid Systems

The auctioning process in some states incorporates the features used in purely tax lien and tax deed states. In this case, the winning investor receives title to the property as he or she would in a tax deed state. The owner has a predetermined period of time to pay the delinquent taxes, interest and penalties to reclaim the property. The investor either earns a nice return on their money or receives the title to the property after the redemption period.

Warnings

Do your homework to make sure you fully understand the procedures and what to expect should you become the winning bidder. You must exercise caution in some tax deed states because liens on a property are not removed after the auction. You will be responsible for paying additional money in order to receive a clean title. You can avoid any surprises by becoming familiar with the bidding process in your county and conducting the necessary research before bidding.