In tax lien states the county/city issues a tax lien certificate that is redeemable by any interested party for a period of time. The period of time varies from 1 year (Indiana) to 20 years (New Jersey) in each state. Now if redemption does not occur within in the redemption period then the lien holder can initiate a foreclosure. The lien holder goes through a legal proceeding within the municipality’s courts. Once title is obtained through the proceedings all prior liens are voided and the property is free of any liens or encumbrances.

In tax deed states the county/city issues a deed to the property. Now in some cases the deed holder is responsible for any liens on the property at the time of purchase. Pennsylvania for instance has two types of sales: Upset Sales and Judicial Sales. Upset sales are deeds subject to all liens while Judicial Sales are free and clear transactions.

The differences that these two “systems” have on the tax foreclosure market has to do with volume. The tax deed states generally tend to have larger markets then tax lien states. This is due to the fact that tax lien foreclosures wipe out other lien holders interests, therefore making it prudent that prior lien holders avoid foreclosure. Now in many of the tax deed states the new owner is responsible for all existing liens, so lien holders will be less likely to fear a change in ownership since their interest is still protected by law.