Investing in tax liens and tax deeds are fairly advanced methods of investing in real estate. But the knowledge required to navigate these investments usually results in a competitive return on investment. If you’re new to the idea of property tax-based investments, here’s a quick lesson about tax lien investing vs. tax deed investing to help you decide which is the right model for you.

Tax Liens vs. Tax Deeds — Similarities and Differences

Tax lien investing and tax deed investing are both based on unpaid property taxes. When a property owner fails to pay their property taxes, the local jurisdiction (typically the city or county) can take measures to redeem the taxes owed. These measures include accepting payments on the taxes due from real estate investors in exchange for a stake in the property. Using PropStream’s Property Tax Delinquency & Tax Lien searching you can get property tax information for individual properties based on Public Record data Nationwide.

Where tax lien investing and tax deed investing differ is in the type of stake the investor gets in the property in exchange for paying the past-due property taxes.

With tax lien investing, the investor receives a lien against the property. The property owner will be required to repay the investor, with interest, before they can refinance or sell their property. Tax liens are auctioned off to the bidder who is willing to accept the lowest interest rate on the lien.

With tax deed investing, the investor receives the deed to the property. That’s right; for just the cost of the back taxes, you could own the property outright. But you’ll most likely pay far more than just the taxes because tax deeds are auctioned off to the highest bidder. In markets with competitive investors, these bids can get near the real market value of the property.  

Should You Invest in Tax Liens or Tax Deeds?

The best method for you probably depends on whether your state is a tax lien state or a tax deed state (there are also a handful of “hybrid” states that allow for both). Of course, you have the option to invest out of state if you prefer one method over the other. But because these investments are acquired through auction, there may be a natural geographic limitation for you.

Generally speaking, tax liens are a better option for passive investors with comparatively little to invest. And tax deeds are better for more active investors with the means to put down more money up front and the desire to take full ownership of the property.

Things to Consider Before Investing in Tax Liens and Tax Deeds

As with any investment, investing in tax liens and tax deeds is not risk free. Here are a few things to consider before you jump into these tax-based real estate investments:

  • If you win a tax lien, it is possible (although not common) for the property owner to default on your tax lien, requiring you to foreclose on the property.
  • Properties come in as-is condition when purchased at a tax deed auction. Before you start bidding, make sure you run the numbers through a rehab estimator tool so you’ll know how much it will cost to rehab the property.
  • In some tax deed states, the original homeowner has a “right of redemption” period that extends beyond foreclosure, during which time they can repay your investment (plus interest) to redeem the deed to the property. After that period ends, the right to the property is yours.
  • There may be other liens against the property. Check for recorded mechanics liens, IRS liens, code violations or possible bankruptcy.
  • You may have to evict the previous owner if they refuse to leave voluntarily.

The bottom line is this: These aren't strategies to jump into blindly. But tax lien investing and tax deed investing can both produce a competitive ROI for the advanced real estate investor using the right tools to conduct careful due diligence before bidding.

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