When a person becomes late on their monthly house payment, eventually the lender will begin foreclosure proceedings which in most cases will start with a notice of default or a lis pendens recorded with the county where the property is located. There are data companies that collect this information, and sell the information on a subscription basis. That is why, shortly after the notice is recorded, the homeowner is usually deluged with mail, phone calls and people knocking on the door offering various forms of assistance and/or foreclosure prevention. The Stop Foreclosure page on this site covers bankruptcy and investor offers along with some sources for homeowner assistance. This page will just cover Foreclosure Bailout Loans and Lease/Buyback Arrangements that require transfer of the property into someone else's name. Bailout loans are included because there have recently been more and more offerings called a "loan" that in reality is a property transfer.
This page will describe a common method of Lease/Buyback, points where a consumer should pay close attention will be marked in bold.
The process begins with contact between the person offering the L/B and the distressed homeowner. The solution presented to the distressed homeowner is to transfer the property out of their name, the distressed homeowner stays in the home and leases the property for a year or more, then repurchases the property after the homeowner's credit has improved. The fee for accomplishing this is stated as free, or at a very nominal cost. We'll discuss the actual costs further down this page.
The property transfer will normally be accomplished by use of a quitclaim deed, which transfers any interest the homeowner may have in the property into a land trust. If the deed is recorded at the county recorder's office, it is not readily obvious to anyone searching the records that ownership has changed, it only indicates the property went into a trust. It is important to note that transferring title does not remove the owner's obligations under their loan. The homeowner still owes on the loan, but no longer owns the security for that loan, which is the home. If the homeowner, or the Lease/Buyback purchaser does not make up past due payments and continue making payments, the lender WILL continue the foreclosure.
Leases can be written with different terms, but a distressed homeowner should note that if you are leasing, you DO NOT own the property. Any statements you make, or forms you sign indicating you are the homeowner will not be accurate or truthful. A common monthly rental amount under a lease/buyback arrangement will be 1% of the amount of the property transfer, for a lease period of 12 months. Property transfer of $100,000 will have 12 lease payments of $1,000 or $12,000 Property transfer of $200,000 will have 12 lease payments of $2,000 or $24,000 Property transfer of $300,000 will have 12 lease payments of $3,000 or $36,000 Lease payments for a personal residence are not tax-deductible and there is no paydown on loan principal, it is just money going to someone else for the use of the space. Remember a few paragraphs up where lease buyback programs are being promoted as being free? They're not. One of the terms that will be written into the lease will be a requirement that the lease payments be on time. If you aren't able to make your lease payments, you'll loose your option to repurchase the property and get evicted as well.
Lenders will sometimes allow a reduced payoff for a loan if it is obvious a foreclosure is inevitable and a third party purchaser is willing to buy the property at a price lower than the full payoff amount. What determines when a foreclosure is inevitable? Commonly, when loan payments aren't being made, and the borrower isn't communicating with the lender or the borrower is communicating, but does not have the economic means to make the payments. What is a third party purchaser? Someone who is not connected/related to the borrower who is willing to purchase the property at a price they consider attractive. Lenders generally will not consider a loan discount if title to the property has already been transferred.
The buyback price after the lease period is over can be anything the parties agree on. One company promotes that they will re-sell the property to the previous owner for 95% of the current market value. Most "damaged credit" lenders will only lend to about 75% of the current market value. So, how's the previous owner going to qualify for financing since their credit is heavily damaged? They do owner financing.They draft a new mortgage for 90% of the property's value, then they backdate it to the time the lease was originated. They then use the lease payments for verification that mortgage payments have been made on time. The backdated loan, along with it's questionable verifications, is then sold on the secondary market. If the previous owner can't come up with the difference between the 95% repurchase price and the 90% loan, they can also get a short term loan from the company.
If an owner chooses to use a program like this, they can expect it's going to cost them at least 12% of the original transfer price in rent, their credit is going to be damaged to a greater extent than when they began the process, and they'll be paying 95% of the property's current value on re-purchase. There are much more affordable programs available for foreclosure help that do not require the use of "smoke and mirrors" to conceal the process.