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I think you are partially right with yoru description of a Tax Lien Certificate. When you buy one of these certificates you are buying the right to foreclose on the property, if the owner doesn't pay the back taxes, but what you are getting in the meantime is an interest bearing certificate. Here is an example:

In Missouri they pay 10% on tax certificates. So if someone owes the city $1000 on a property you go to the auction and buy the tax lien certificate for $1000. The certificate lasts for 3 years and carries with it interest penalties equal to 10% per year. So for three years you have an interest bearing instrument. If after three years the owner doesn't pay the back taxes you can foreclose on the property and take it over. Obviously you would need to work out the other existing liens with those lienholders, but if the property is owned free and clear and there are no other lienholders you get the property for your $1000 investment.

If the person pays off the backtaxes they are liable for the $1000 and the interest that comes with it. So you had a ST interest bearing instrument with a booster potential where you might be able to get the property. These things are extremely secure since they are backed by real estate, and since it's back taxes you are the first lien holder (in most cases) so you're first up at a foreclosure.

Hope that helps.
Fool on!!
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