Both Tax Liens and Tax Deeds are basically unpaid taxes of delinquent properties resulting in public auctions. That could be the main reason why buyers or first time investors find too confusing. To be more specific, both the tax lien and the tax deed sales are initiated once a homeowner neglects or fails to pay the taxes imposed on the property. The local government authority, either the municipality or the county will then decide whether to pursue a tax lien or a tax deed. If it chooses the tax lien route, the resulting lien is auctioned off to an eventual buyer who in turn is entitled to collect the back taxes from the owner plus interest and penalty. On the other hand, Tax deeds are auctioned once a homeowner appears incapable of paying the back taxes on his property. Here the buyer or investor has direct claim to the property. To give more clarity these are the glaring differences:
1ST DIFFERENCE:
Tax Liens are a lien placed on a property and you don’t actually OWN the property. These are liens imposed by law upon a property to secure the payment of taxes, and are most commonly placed on a property because of delinquent, or unpaid taxes. Essentially, the local government needs to get money to pay for its basic expenses (Roads, Schools, Medical Services, firefighters, Police etc.) and one of their main sources are the taxes paid by homeowners taxes to the county.
When the homeowner can’t pay those taxes, a lien is placed on the property. The good thing about Tax Liens is that they are the top priority Lien on a property. For almost all cases this is true. But it’s always best to double check with the county you’re buying from, just to be safe.
This simply means once you bought it, all other liens on the property “ cleared the title.” These liens could be Mortgage, Liens from Plumbers or Electricians or other works done, etc. Clearing the title can be done by hiring a Tax Title Servicemen, so you need to include this in your budget when buying Tax Liens.
Now, once you purchase a lien from the county sale, it doesn’t necessarily mean you have access to the property. A time period for that Lien is set to be redeemed by the homeowner.
It varies by state, but it could be from 1 year to 3 years. This is called the redemption period.
There are penalties that the homeowner must pay, and if reaches the full 3 years, it significantly goes up.
The good thing is even if the property redeems 5 minutes after the Tax Sale, you get your minimum penalty fee of whatever percentage is set by that state. It could be 8% all the way up to 36%.
2ND DIFFERENCE:
Tax Deeds are exactly what they sound like – a DEED to the property. This means when you participate in a Tax Deed sale, the moment you acquire that property deed, and have it recorded, you are the FULL owner of that property and can do with it as you pleased! You can even evict any occupants if any or rent it out or sell it.
However, it is also worth mentioning that there are what we sometimes call hybrid states. These states apply some rules that are a combination of Tax Lien and Tax Deed. That is, when you purchased a tax deed to a property in a hybrid state, you need to wait until the redemption period in order to take control of the full property. Unlike in a Tax Lien you don’t have to foreclose on it. Assuming the owner redeems, you will get what you paid for the lien/deed, plus an interest rate set by the state. For example, if you bought a property at the tax sale in Texas, and the homeowner redeems the next day, you get what you paid for the property, plus the whole 25% interest rate on top of the price you paid.