Tax Lien Vs Tax Deed Sales

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Different states are categorized as either tax lien states or tax deed states. If you are interested in investing in tax-distressed properties, you should take the time to develop your knowledge and understanding about the industry. This area of investing has its risks, but it can help you earn a significant return on your investment and accumulate a portfolio of properties at below-market prices.

Significance

  • In the United States, property owners who cannot pay their property taxes, and become delinquent on their obligations for any reason, are subjected by law to have their property sold for the delinquent taxes. Generally, the sale takes place at a public auction in the county where the property is located. The winning bidder is issued a tax lien certificate or a tax deed, depending on the state in which the property is located.

Tax Deed

  • In tax deed states, delinquent property taxes are recouped by the county via the sale of ownership to a winning bidder at public auction. In some cases, the rights to the property are assigned at some predetermined time period in the future. Usually, the property is sold for delinquent taxes, interest, fees, penalties and court costs. Many states give property owners a chance to regain control of their property after the auction by paying the delinquent property taxes, interest and other costs within a specific time frame.

Tax Lien

  • In tax lien states, after property taxes go unpaid for a specific period of time, the delinquent taxes are put up for sale at an auction, or tax sale. The sale is held by the county. The winning bidder pays the overdue property taxes on the property. In exchange, they receive a tax lien certificate that pays them a return of 18 percent interest a year, or more, on their investment. Furthermore, if the property owner does not redeem the property within a specific period of time, the property may be foreclosed on and the investor can end up with ownership of the property.

Benefits

  • One of the advantages of investing in tax liens is that the liens have a priority over other encumbrances, such as mortgages, judgments, trust deeds and other liens. In addition, the investment is one of the safest you can make. The return is typically somewhere around 18 percent or more per year. Currently, in the State of Iowa, the interest rate is 24 percent annually. Investing in tax deeds can also be lucrative. The investor may gain complete control of a property that has a market value considerably higher than what the investor paid for the tax deed.

Considerations

  • Investors in tax lien and tax deed sales will need specialized knowledge and understanding of the laws in the state where the property is located. You'll also need to be aware of the laws regarding redemption periods, which is the time most states give owners to retrieve their property after the tax sale. In addition, you may be required to send out certain notices; record your liens and follow other regulations. You can contact the county where you will be investing and request the latest information.

    You'll also want to inquire into whether or not all liens on the property are wiped out after you pay the delinquent taxes or whether you will be responsible for paying off addition liens on the property in order to gain unencumbered ownership. Individuals who invest in tax deeds must make sure they do their homework. In some cases, the property they are investing in may be in need of substantial repairs or located in an undesirable area and may not be worth the investment, even at what seems at first glance to be a low price.

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