Most investors know the difference between a tax lien and tax deed. They understand that when they purchase a lien they are not buying the property, but paying the taxes on a tax delinquent property and putting a lien on the property so that if the property owner doesn’t pay the amount of the lien plus interest and penalties, in a given amount of time (the redemption period) they can foreclose on the property. And they understand that when they go to a tax deed sale and purchase a tax deed, they are actually purchasing the property. But many would be tax investors do not understand what a redeemable deed is and how it differs from a lien.
What Is a Redeemable Tax Deed?
A redeemable tax deed is something in between a lien and a deed. When you go to a redeemable tax deed sale, you are actually purchasing the deed to the property. If you are the successful bidder, you will receive a deed to the property. That deed, however, is encumbered for a period of time known as the redemption period (not to be confused with the redemption period for liens). The owner can redeem the property by paying the amount that was bid for the deed at the tax sale plus a hefty penalty. If the deed is not redeemed during the redemption period then the previous owner is barred from redeeming the property and the tax deed holder is the owner of record and the legal owner of the property.
Which is Better, Redeemable Deeds or Tax Liens?
A redeemable tax deed is very similar to tax liens, but there are some important differences that I believe make redeemable deeds a better deal for the investor. I will point out that every redeemable state treats these deeds differently. In some states, like Texas for example, when you purchase a redeemable deed you are considered the legal owner of the property and can evict anyone who may be in the property once you record the deed. The previous owner has redemption rights, but is no longer considered the rightful owner of the property. But in Georgia, which is another popular redeemable deed state, when you purchase a deed you are not the legal owner of the property until the redemption period is over and you foreclose on the property. In Georgia you must foreclose the redeemable deed much like you would a lien in order to take ownership of the property.
But in both states and in most other redeemable deed states, in order to redeem the deed, the owner must pay the investor what they bid at the tax sale plus a hefty penalty, not interest. What this means is that if you purchase a redeemable tax deed and it redeems a few days after you record the deed you still get the full penalty amount. You make the same interest on your money if it redeems in 2 weeks or 2 years. A penalty is not annualized like an interest payment would be.
What are the Drawbacks to Investing in Redeemable Deeds as Apposed to Tax Liens?
The problem with investing in redeemable deeds is that there are only 5 states that sell them and none of these states have online tax sales, so you have to show up for the auction in order to participate in the sale. The 5 states that do sell redeemable tax deeds are Connecticut, Georgia, Hawaii, Tennessee, and Texas. To find out more about Tax Lien and Tax Deed investing go to http://www.TaxLienInvestingBasics.com and get your free special report on the 7 Steps to Building Your Profitable Tax Lien Portfolio.