First, the homeowner will deed or transfer the property to someone else, usually an investor who understands the technical aspects of putting this type of transaction together.
In return for transferring title to the investor, the homeowner signs a lease and an option to re-purchase the same property for one to three years in the future. That's the simple explanation; now let's look carefully at the transaction.
Approximately 85% of the time a homeowner wants to stay in his property that is in foreclosure. He didn't purposely get into foreclosure and he has established "roots" in the local community so he doesn't really want to move.
He also is faced with not being able to purchase another home easily because of his tarnished credit from the foreclosure problem.
When approached by an investor with the option to transfer his home to the investor in exchange for the investor getting a profit by re-selling the home back to the homeowner in a year or two, the homeowner sees this as a real solution to his dilemma.
The investor explains that the homeowner will sign over the deed to his home, the investor will bring his delinquent mortgage(s) current and the homeowner will lease the home back from the investor.
The homeowner doesn't even have to move out of his home to make this work and his challenged credit is no problem. The investor will explain how the homeowner will be guaranteed the opportunity to re-purchase his home at a reasonable markup in one or two years and can move forward after that.
If the same loan stays in place, the homeowner can just continue making payments to his old lender and not have to re-qualify for a new loan or pay new closing costs. This process is called taking over the property "subject to" the existing mortgage staying in place.
All of this explanation is correct, but there are some caveats and disclosures that the investor may not explain to the homeowner.
More and more states are passing legislation against lease options being used in foreclosure transactions or at the very least heavily regulating these transactions because a few unscrupulous investors have taken advantage of homeowners at the worst and most vulnerable time of their lives.
After the homeowner signs the deed to the investor he is no longer the owner of the property and is only staying in his former home at the mercy of the investor and the lease he signed.
Investors know that despite homeowners resolving their foreclosure problems, most of the time over 60% of all homeowners will be back in foreclosure within nine months!
If the investors had re-financed the homeowner's mortgage it would have been expensive and the investor would have to evict the homeowner by a foreclosure proceeding to get him out of his home; just as the original lender had to do.
The better option is to have the homeowner in the premises with only a lease agreement so the homeowner can be evicted in as little as two weeks in many states.
If the original loan was reinstated, the homeowner will be evicted but the mortgage will still be the responsibly of the homeowner and if the investor re-leases the property and doesn't make the mortgage payments, the lender will have a foreclosure to go through again!
Unfortunately the homeowner will have his credit smacked by any late payments made by the investor, even if the investor keeps the rent money from a new tenant and doesn't make the mortgage payments. There are a number of things a foreclosure victim can do to protect himself from the few ruthless investors who would pull this scam.
First, have an attorney review the lease and the option agreement. If the lease and option agreement are two documents, request that they be one single agreement.
In most court verdicts, if there is only one agreement and not two separate agreements (lease and option), the courts have held that the homeowner (lessee) is accruing equity in the property with each lease payment.
It makes it harder for the eviction process and easier for the homeowner's attorney to defend his position. Also make certain that the lease has at least a 30 day "cure" period and at least three attempts to cure the late payments as this is standard in many states.
In summary, a lease option is a viable option for stopping a foreclosure but the homeowner must be aware of his risks in this transaction and be represented by competent legal counsel.
This overview of the process is not meant to be legal advice, always seek a competent attorney when you are involved in a legal matter.
This article explains advanced strategies for well-experienced real estate investors who want extra protection for their investments. Keep in mind that the strategy chosen will depend on the type of investment strategy followed. In other words, not every strategy applies to a particular situation. Also, they some solutions may not be ones an investor commonly used. However, knowledge of those solutions may come in handy in the future.
A Basic Protection-the Memorandum of Option One disadvantage of lease options, in particular, is financial difficulties on the part of the seller, resulting in liens, delinquent property taxes and the like. The result can be the time and expense of getting these issues worked out before the property can be sold.
The Memorandum of Option is a basic protection for the investor. The memorandum is a document is a record against the title of the property and should always be recorded. It informs the public that you have an interest in the property.
The purpose of the memorandum is to prevent an unethical seller from refinancing and selling the property to someone else. It also provides you protection from bad faith sellers who try to squirm out of their obligations. With lease options, always record a memorandum of option!
Advanced Strategy 1-the Deed in Escrow Usually, the term escrow refers to the deposit of funds by one party for delivery to another party upon completion of a specific event or condition.
However, the definition also includes the deposit of deeds and other written financial/legal instruments. I recommend placing the deed in escrow at the time the memorandum of option is filed. In this case, the seller signs the deed along with the other contracts, but the deed is not recorded on the title at this point. Instead, it's held in escrow by a title company or attorney, and they're provided with instructions for its release.
Now, this action doesn't protect against the filing of liens against the property. But, its effect is to reinforce to sellers that they've actually sold the property. This, in turn, creates reluctance on their part to try to back out on a lease option agreement.
It also has another benefit: It permits the investor to close on the property without the seller being present! With the deed in escrow, the investor should specify how and when the deed is to be released and recorded. The instructions can be simple, such as this example: "When Sam Smith pays $200,000 in certified funds to John Jones, the deed will be released to him. By (date), these funds must be paid."
Advanced Strategy 2: The Performance Mortgage With this method, the seller pledges the property as collateral for the lease option agreement, and, therefore, ensures good faith performance by that seller. Once the mortgage is assigned to the buyer, it prevents the seller from selling the mortgage to other people. (It replaces the memorandum of option filing.)
The performance mortgage permits the seller's insurance company to put the buyer's name on the owner's policy as another insured. It shows as well that the buyer is a lien holder and requires that he or she be notified if any type of foreclosure action is taken.
Naturally, some sellers dislike the idea of a performance mortgage and won't agree to this deal! In the event that a performance mortgage is agreed to, an attorney should review the terminology of the mortgage to make sure the appropriate, specific clauses are included.
Advanced Strategy 3: The Land Trust Land trusts are formed by organizations established to hold land and to administer use of that land. You'll find that this technique is very useful with subject-to's because a land trust minimizes your exposure to litigation.
It achieves this by hiding true ownership. The actual owner or beneficiary is not recorded in the public records, only the trust's name. In other words, it's difficult to get sued because litigants find it hard to identify anyone to sue.
Keep in mind that land trust contracts tend to be complicated and long so you'll definitely need an expert lawyer to draw them up.
Advanced Strategy 4: Get a Partner In some cases, you may want to consider subject-to high-end properties (in terms of rapidly appreciating value). With these properties, there's more risk. Since there is more risk, you can spread that risk by taking on the seller as a partner. In this case, the buyer and the seller share the profits.
Here's an example: Assume a property is worth $800,000 and the monthly rental is $3,500. Under normal circumstances, you'd likely back away from this deal. However, let's assume that you discover this home might be sold for $200,000+ in profits. This deal makes good financial sense for both you and the seller. So, you agree on a 50-50 partnership (or another percentage arrangement), and you both end up happy.
My suggestion: If you use this method, insist that the seller cover all the risks.
Advanced Strategy 5: Refinancing Refinancing is a tax-deferment strategy. Here's an example: Assume an investor has a house worth $300,000, and $230,000 is owed on it. Through a new mortgage, that investor can take out some or all of the $70,000 in equity, and it's not a taxable event. That means this investor can use that money to reinvest in other properties while still holding on to the original property.
Check with lenders and brokers in your area to find out what refinancing programs are available.
Tax Concerns The methods I've just described have to meet IRS regulations. So, you and your tax person should be on top of those regulations. They do change from time to time, and those changes can affect the legality and profitability of deals. One area to really stay on top of is capital gains.
Capital gains are the profit on the sale of a property. At the present time, you can sell your primary residence (the one actually lived in, not investment properties) every two years.
If a person is single, he or she can keep the profits up to $250,000; if a person is married, he or she can keep up to $500,000. In both instances, the profits are tax free. If the seller of a property lives in his or her home for two out of five years, then that property qualifies for a tax-free gain. The seller can rent the home out for three years - and not a single day more.
My Advice Never stop learning! Keep advanced strategies in mind as you grow your investment portfolio. It's not likely you'll need them for the majority of investments (especially early in a career), but, as is often said, knowledge is power. With that knowledge, you'll be able to apply it quickly and easily when the right investment situation arises.
Key Point: Always get the lenders written permission. Study advanced strategies in depth, so you can make use of them at the appropriate time for maximum protection of your investments.
Both Dave Dinkel & Jack Sternberg are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Dave Dinkel has sinced written about articles on various topics from Foreclosure Help, Internet Marketing and Advertising Guide. Dave Dinkel is the author of "32 Ways to Quickly Stop Foreclosure" and has helped thousands of foreclosure victims for nearly 33 years. If you are facing foreclosure, visit. Dave Dinkel's top article generates over 33100 views. to your Favourites.
Jack Sternberg has sinced written about articles on various topics from Home Buyers Guide, Mortgage and Interest. Jack Sternberg is the creator of the renowned "Buyers First Program". As the "gurus' guru", he is well known by the professional creative real estate community as "Obi-Won Kenobi". Having been a full time investor since 1977, Mr. Sternberg has been "at". Jack Sternberg's top article generates over 14800 views. to your Favourites.