Basic Investing Insights

What are Tax Liens and Tax Deeds?

Rachel Seidensticker
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The following definitions are excerpts from the free online eBook Lien Baron's Tax Lien Investing Secrets.

The exact definition may vary from county to county. Therefore, Tax Sale Resources recommends contacting the county for their exact procedures.

Tax Deeds

Tax deeds may be purchased at county auctions in the same fashion as tax liens. The primary difference is that instead of purchasing the right to collect interest with a chance of property ownership if the lien is not repaid, you are purchasing property ownership outright. Tax deeds are usually offered on properties with several years of back taxes. The current property owner is given no additional opportunity to retain their title; once you purchase the tax deed that property becomes yours.

While tax deeds sell for significantly more than most tax liens, they still offer huge earning potential. Because you are now purchasing the property itself vs. just a chance of owning the property, you must be even more diligent in your research. Never show up to a deed auction with less than a week of research, and always view properties you intend to bid on. For obvious reasons, tax deed investing is not something that should be done sight unseen like some tax lien auctions are.

Tax Lien Certificate

If you are a home owner, then you may have a one-sided understanding of this term. The tax portion of the term typically refers to unpaid property taxes. The dictionary definition of lien is:

“The legal claim of one person upon the property of another person to secure the payment of a debt or the satisfaction of an obligation.”

By putting these two concepts together, we can now see that a tax lien uses an individual’s property as collateral to ensure the settlement of a tax-related debt owed to another person or entity. While initially that debt is owed to the government that imposes the taxes, after a set amount of time these government agencies will auction unpaid debts to recoup their own expenses more quickly, opening an opportunity for savvy investors.

Tax Deeds and Tax Liens

Not from Lien Baron's Tax Lien Investing Secrets

Tax Deed & Tax Lien systems are exactly as they sound. Investors first attend a tax lien auction and bid per the county procedures to purchase a tax lien.  Following the redemption period of the tax lien (ranges from 6 months to 3 years) the lien holder must then inform the county they would like to redeem their lien.

Rather than being assigned a quitclaim deed, the county then holds a tax deed auction, or assigns a tax deed directly to the lien holder.

If there is a deed auction, the proceeds gained from the tax deed sale then go towards paying the amount due to the investor.  In many cases, the tax lien holder ends up purchasing the tax deed.  In such case, the lien investor, who was the lien holder, is now the owner of the property deed.

If the county assigns a tax deed directly to lien holder, the investor now owns the deed to a property for the cost of what they paid to redeem the back taxes.

Redeemable Tax Deeds

Hybrid systems are a combination of the tax lien and tax deed sales systems. In a hybrid system, you purchase the title at auction in the same way that you would purchase a tax deed, but as with a tax lien the original property owner has a redemption period that allows them to meet certain conditions to retain their property. This may sound like a high risk investment, but in truth it is a very lucrative one. You can usually purchase the property title for a mere fraction of the property value.

At hybrid auctions, buyers typically bid up, meaning that the bidding starts at the amount of back taxes owed and goes up as bidders decide what premium they are willing to pay. But, unlike some tax lien premium auctions, your premium does not go unrewarded. Bear in mind that what you pay for a premium could be what you are paying for the property and that even if the property owner redeems their title, it will be at significant cost to them and serious profit to you. To redeem their property, the original owner will not only have to pay back the property taxes and premium (as with a lien) but will also have to pay a penalty rate that is often well above the maximum statutory interest rate allowed on tax liens. So if your initial investment was $32,000, you will earn a profit of at least $8,000.

Even better, during the redemption period the property is still considered yours, so should the property owner fail to redeem their title, they will be unable to damage the property in any way. Not only that, but you are free to do with it as you please until they do (or do not) redeem it. That means you could rent the property and all proceeds would be additional profit. When done correctly (i.e.: when you research the properties and buy low), hybrid systems are an excellent investment opportunity.

Author - Rachel Seidensticker
Rachel Seidensticker
Chief Operations Officer
In the Tax Sale Industry Since 2010
Rachel is responsible for managing and overseeing the daily operations of Tax Sale Resources, which produces data for approximately 8,000 nationwide tax sales yearly. She started in the tax sale industry originally as an investor but decided to change course and team up with her brother (Brian Seidensticker) to build Tax Sale Resources quickly thereafter.

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