Hey there, it’s Casey Denman with TaxSaleAcademy.com and welcome to our weekly question segment. Before we get started with this week’s question, if you enjoy these tax sale training videos, don’t forget to hit that red subscribe button so you don’t miss out on future videos.
This week’s question has been asked by a number of people, including Mario, Elizabeth, and others recently. And that’s why should someone invest in tax liens, instead of tax deeds?
So, let me very briefly go over the two and then we’ll get into the comparison. So when someone fails to pay their taxes on time, the property begins the process towards tax foreclosure. This can occur a few different ways, but the most popular are through a tax lien system or a tax deed system, and this depends on the state.
In a tax lien system, the owner is delinquent. A priority lien is sold against the property to a tax lien investor, this is where to tax lien investor essentially pays the taxes due to the county in exchange for that lien. The owner then has a set time period to redeem the lien, by paying all the back due taxes. In addition to those taxes, however, there is also now interest due to the tax lien investor, which is how they earn their money. If the lien is redeemed, the property owner cancels that lien, the tax lien investor gets their money back plus interest and everyone moves on. If the property owner fails to pay the back due taxes, the tax lien holder can then foreclose that lien and become the owner of the property. This is pretty rare and happens just 5-10% of the time depending on where you get your stats. So it’s a lien, that earns interest, backed by real estate.
This differs from a tax deed state. In a tax lien state, it starts the same way. The property owner fails to pay the taxes on time. But instead of selling a lien against the property, the county actually holds this lien themselves. After a set period of time, the county then forecloses the lien themselves and they sell the property outright. So you buy a property not a lien.
Alright, back to the original question. Why should someone even mess with liens? Or why should someone mess with deeds?
The truth is that they are comparable, but certainly different investment vehicles. As a tax lien holder, you will more than likely receive your return when that lien is redeemed by the property owner. They’ll go in, make payment, and you’ll be mailed a check. That’s it.
With a tax deed you must sell or otherwise use the property to generate your return. Until you take the additional steps to do that, you won’t make a penny. In fact, you’ll be losing money as you’ll now have to pay the taxes and you now have to maintain that property.
Of note, is that the upfront research is generaly the same. That lien is backed by real estate, which means you must know the value and characteristics of that real estate before buying the lien. And obviously you’ll want to do the same for a tax deed.
In short, tax liens will earn less money. But they’ll also require much less work. Tax deeds will earn more money, but they’ll also require substantially more work. So much of it depends on your specific investment objectives. I’ve got members who only want deeds. Especially, the younger ones. Earning 8, 10, 15, 20% interest isn’t appealing when you’re young. But as you age and diversify, you’ll realize that it’s nice to have those type of returns to park your money in, while you also invest in other things, such as tax deeds. I’ve even got some older client who ONLY want tax liens, and don’t want to mess with the selling side of anything.
So, as you can see it’s a matter of different objectives for different people. One might be best for you while another is best for someone else, and a mix is the best for the third person. Learn about both, see what’s best for you, and then get started!
So I hope this has answered today’s question for those watching. If you have a question, please feel free to leave it in the comments section and I’ll make sure it gets answered for you.
If you’re looking to learn and we can be of help, there are a bunch of helpful links down below in the video description, including one to our primary site which is at www.TaxSaleAcademy.com
Take care and make it a successful day. See ya!