While both a Tax Deed Sale and a Tax Lien Sale are intended to satisfy the same cause (the government collecting the tax money they are owed), they go about it in two very different manners. Both types of sales are almost like the issuance of a bond, where a normal citizen essentially lends the government money.

Basics of a Tax Lien Sale

A Tax Lien Sale is just that, the effective sale of a tax lien from the government to a citizen. In a tax lien sale, a person pays the government the full amount of someone else's tax lien, and in exchange receives, in some cases, a very generous amount of interest. The interest rate the government pays varies state by state. Illinois, for example, pays as much as 30% per year. Once the lien is satisfied either in foreclosure or if the property owner pays the lien off themselves, the lien purchaser receives their money back. 

Basics of a Tax Deed Sale

In a Tax Deed Sale, the purchaser is effectively buying the rights to a property (deed) free and clear of any lien or mortgages. However, a tax deed sale is going to get bid up higher at auction than a tax deed sale typically will (because the purchaser of a tax deed actually owns the property), so it will typically cost you quite a bit more. Tax Deeds need to be paid for in cash, so it’s not a game for the poor. If a property with a mortgage on it is going into foreclosure for nonpayment of taxes, the lien will typically be paid for by the mortgage company as they would lose all rights to the property should it hit deed sale. Property deeds that end up in a Tax Deed Sale either don’t have a mortgage on them at all, or the mortgage company decides not to pay the lien, which typically occurs in a down-market.

Risks

Some states offer tax lien sales, and some tax deed sales, rarely do they offer both. Of the two types of sales, tax lien sales are typically the safer investment, while tax deed sales can offer a much higher rate of return.