Investors and financial institutions are naturally attracted to the benefits of investing in tax liens and tax deeds. But the tax sale process, created to collect unpaid state and local property taxes and other municipal assessments, varies from state to state. Some use a lien mechanism, in which a creditor takes a security interest in real property pledged to secure payment of the delinquent taxes. Other states auction tax deeds, transferring ownership to the entire property. And still others, known as hybrid states, allow municipalities to choose either or a combination of both methods.

The difference between how tax liens and tax deeds and how tax sales work in a particular state can have a significant impact on how an investor or mortgage holder protects its investment. Investing in tax liens or tax deeds can yield interest on unpaid taxes and other fees. But failure to understand differences in how tax sales work from one state to the next can devalue or even eliminate your interest in the underlying property. Investors, mortgage holders, and other interested parties need to understand these differences to protect their investments.