There is a hidden investment gem out there that many people are not even aware of. If you haven’t heard of the very lucrative world of tax liens and deeds, you are not alone. Even though this form of investing has been around for about 200 years, it is often misunderstood and there are many myths surrounding them. So just what are tax liens & deeds? When a property owner or business becomes seriously delinquent in paying their property taxes, the county will put their property up for auction. The counties need to recover that tax money to keep things running smoothly. For example, they need to pay their police and fire departments and pay for infrastructure, such as roads and schools. You may wonder why someone would let their home go to auction, and sometimes the amounts in arrears are relatively low compared to the value of the home. There are many life events, such as the loss of a job, death, divorce or serious illness that can force an otherwise responsible taxpayer to fall behind. Another reason some property owners allow this to happen is that they may be upside down on their mortgage – owe more than the property is worth. Sometimes it is as simple as the property owner changing their address and not notifying the county. Tax assessments never get to the taxpayer, resulting in the delinquency. If this sounds like the investor is taking advantage of the homeowner when they are down on their luck, that really couldn’t be further from the truth. In fact, this strategy actually helps the homeowner. Most states offer some kind of redemption period, so it really becomes a sort of “loan” to the property owner so that the taxes get paid and this buys them some time until they can sort out their financial situation. There are differences between tax liens and tax deeds. Tax liens are certificates which give the bearer the principal amount back plus interest or a penalty during a predetermined redemption period. With this strategy, the investor does not take on ownership of the property. Despite this, it is actually a fairly safe method of investing because it is considered a high priority lien, superseding all other liens and even mortgages. Tax liens are a great passive investment because the county does all the heavy lifting for you. The investor never has to deal with the homeowner or tenants because the county does it all. You pay the back taxes, sit back and wait out the redemption period and the homeowner will pay it back with interest and penalties. The county takes care of all of this and the investor just collects their money at the end of it all. If the property owner does not pay the property will be foreclosed. Tax deeds are different because the property is put up for auction and the high bidder actually gets the full deed to the property. Although there is usually no redemption period, there are exceptions depending on the state. In Texas, for example, there is a 6 month redemption period. The opportunity to get homes for pennies on the dollar are huge, but there are some pitfalls to tax deed auction investing. Be sure to research carefully before you invest because there are no refunds and the property is sold “as is”. You must pay cash or cashier’s check on the spot. So which is better? Tax liens or tax deeds? It really depends on your strategy – tax liens are less work, cheaper and don’t have the liability of ownership. Tax deeds are more work, more expensive but can offer cash flow, appreciation or big profits from a quick flip. As with any investment, including tax liens and deeds, it is advisable to do your homework to make sure you know what you are getting into. Also determine your exit strategy to know when and how you will be able to cash out.