Tax liens and tax deed investing explained

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Sitting here at a Starbucks for my afternoon caffeine fix and found myself in the discussion with a woman about tax deed investing. She asked me a common question, “What is the difference between investing in a tax lien versus tax deed”. As most of my post are generated as a tool to share my common asked questions I whipped out my laptop to share some of the topics from our discussion.

What is a tax lien and deed and how do they work

To understand how to invest in a tax lien or deed you first want to know how they exist. In short the local municipality (typically called a tax assessor) charges each property owner a tax. This tax is used to pay for the needs of operating the town or city. Things like police dept. highway dept. and fire dept. are expenses the cities have and these expenses are paid thru your property tax payments. If a property owner does not pay their taxes then the cities income does not keep up with their expenses and of course the city cannot have this as the services and expenses continue on.

The remedy to get this paid immediately is to raise the money by selling a tax lien and should that fail to work the follow up remedy is to sell the property by way of a tax deed.  

Tax Lien investing?

A tax lien is an encumbrance on the title to a piece of real estate (in layman’s term it is a legal document the local tax assessor places on the property as a means to collect unpaid taxes). It is created when a property owner doesn’t pay their real estate taxes or other municipal charges like water and sewer bills. The governmental authority files a Tax lien against the title.  

The tax authorities are essentially now selling this tax bill to an investor. When investing in tax Liens you are essentially paying off this Lien for a pre-determined guarantee rate of return. This rate of returns varies from municipality but usually has a high rate of return and the property itself is your collateral to insure the lien gets repaid, So, this proves to be a very safe and lucrative investment.

The home owner must pay you the full amount they owe you plus interest and fees in order to free their property back up and get the lien removed. Typically home owners are very motivated to get this lien removed because all the equity they have in the property is being used for collateral. If they do not repay you, you may have rights to take their property, evict them and sell the property and no one wants that to happen. These tax lien investments tend to be very lucrative and are essentially win wins for all involved. The investor gets a great return and the home owner was bailed out of the possibility of the next consequence (the Tax Deed sale).

Tax Deed investing?

When a property owner who is delinquent on their real estate taxes fails to ever pay or catch up on their property tax payments. The local tax assessor’s office (or governing body to that municipality) may actually order a Tax deed sale. The governmental authority then auctions the property to recoup the taxes and fees. The property is sold for an amount at least sufficient enough to cover the delinquent taxes and legal fees.

Buying Tax Deeds:

Buying tax deeds at auction may be a way to get into real estate investment, especially if you don’t have a lot of money. It can be a lot of work, but sometimes there isn’t a lot of competition. The one thing you must be is educated on the ins and outs of investing in tax deeds. One thing you want to investigate before an auction is whether the tax deed is the only lien on the property. Depending on the jurisdiction, a tax deed may not extinguish a lien like a mortgage. If there is no Mortgage on the property or there is a lot of equity in the property these tax deed purchases can be extremely lucrative.

The key to lucrative investing is knowing how to identify the best tax deed investment properties. You want properties that you identify as having a small or perhaps no existing mortgage on it. When you do your diligence, and see that investing say $20,000 on a property that is worth $100,000, has no other encumbrances on it and has very few competing offers you have the recipe for an investment opportunity.

Within a tax record are most all the clues you need to know if it is a good investment, or a potential money pit. It is what you don’t know that may make or break you. Knowing how to read a tax record and identifying both the opportunity as well as the potential risk is paramount to being a great and successful investor. Knowledge is power. Happy investing!

My friend Mike Wolf, with Mike Wolf Mastery, is a coach and trainer who has been involved in hundreds of these tax deed Sales. Attend a 3 day intensive training with a bus tour and actual tax deed sale where you can actually purchase with Mike by your side.


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The author’s opinion cannot be construed as tax or legal advice, and may not represent the views of HTBUSA or its stakeholders. HTBUSA is not a legal professional tax service. As with any investment, there is an inherent risk in investing in real estate.