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For the two-hundred plus years of the history of the United States the government has levied taxes against real estate. These taxes are used to fund schools, hospitals, law enforcement, public parks, and road construction. If residents do not pay their taxes, the government does not have the necessary funds to carry out their daily services. So governments use the sale of tax liens and tax deeds to collect on back taxes they are owed. When governments sell tax liens they are selling the debt owed to the government and not the actual property itself. Tax liens are sold at an auction which is usually held once a month on the courthouse steps. In a tax deed sale the government is selling the deed to the property. Each state will utilize either tax liens or tax deed sales as the method of collecting on delinquent taxes. When an investor purchases a property they are given title to the property usually in the form of a warranty deed. All deeds are recorded at the local courthouse in the county where the property is located. In order for a property-owner to be able to sell their property they must satisfy all liens recorded against their property. For this reason some states use tax liens as the method to collect money from delinquent taxpayers. The money collected by the government in the sale of the tax lien is used to pay the delinquent taxes owed by the property-owner. In exchange for purchasing the tax lien, an investor is given the right to collect on the outstanding tax debt and their lien is placed in first position ahead of mortgages, deeds of trusts, and judgments. Tax liens are only subordinate to federal tax liens. Each state establishes an interest rate that the investor can charge the property-owner for non-payment of the tax bill. Some states allow the investor to foreclose on the property if the tax bill plus interest is not paid in full within a stated time-period. If the investor forecloses on the property, all junior liens are dissolved and the investor gains title to the property. When a government sells a tax deed, it is selling the actual title to the property of the delinquent taxpayer. Like a tax lien sale, tax deeds are usually sold at auction once a month on the courthouse steps. Prior to the sale of a tax deed, the property-owner and all mortgage holders are given adequate notice of the sale. At a tax deed auction, the winning bidder purchases the deed to a piece of property, becoming the new owner and obtaining all rights to the property free and clear of liens, mortgages, and deeds of trust. Some states allow a redemption period where the former property-owner can reclaim the property by paying an amount equal to the tax deed sale plus a penalty. Purchase of tax deeds and tax liens can be an investment strategy used by investors who do not want the headache of becoming property managers.
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