So many new tax investors don’t understand the difference between a tax lien and tax deed. They have heard that liens are a great investment and that you can get the property with a lien. So they confuse tax liens and tax deeds. For those of you who think that buying a lien is a good way to get property, you’re wrong.
Tax lien investing is not a good way to gain property for back taxes. When you buy a lien, you are not purchasing the property. You are simply paying the property owner’s taxes and getting the interest and the penalties that the government would normally collect. One of the reasons that liens are such a good investment is that if the lien isn’t redeemed within a given amount of time (this is the redemption period and varies with the county and state that the lien is purchased in), then the lien holder can foreclose on the property.
It is very seldom that a lien on a good property will not redeem. So the lien buyer almost never gets the property, unless the lien buyer specializes in purchasing liens on vacant land, or properties that have issues, or unless the lien buyer doesn’t do his or her homework and buys liens on junk properties. Tax lien investing, while it’s a great way to invest your money at a high return, isn’t a way to buy properties for a fraction of their value.
What’s different about a tax deed is that when you purchase a deed you are actually buying the deed to the property, not just a lien. When you’re the successful bidder at a deed sale, or if you purchase a tax deed directly from the county, you are actually purchasing the property and will receive some sort of deed to that effect. Usually it is a non-warrantee deed. In most deed states (but not all of them, there are a couple of exceptions), the property is conveyed free of any liens, but there is no warrantee on the title. The title may have to be cleared before title insurance can be issued on the property, and the deed buyer may have to evict any inhabitants, but the property reverts to the deed buyer once the deed is recorded.
Now I don’t want to confuse you, but there are a few states that sell redeemable deeds, and in these states the deed doesn’t actually revert to the tax deed purchaser until the redemption period is over and the deed isn’t redeemed. It is somewhat in-between a lien and tax deed, in that you’re actually purchasing the deed at the tax sale, but the previous owner has a period of time to redeem the property. There are usually steep penalties when redeeming these deeds that go to the investor, so redeemable deeds are a good investment for the purchaser either way. Either they come away with the property or get a great return on their money.
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