Distress and foreclosure opportunities have attracted so many buyers that there seems little opportunity for the average person to complete a purchase. But when one approaches distress in creative ways, much of the competition just doesn't appear. Here are some examples:
Suppose you encountered someone in distress stemming from a temporary shortage of funds rather than from permanent inability to cope with economic life. While they may not really want to sell you an option on their property, they might give you one in return for a low interest rate loan to tide them over for a short period. Now here's where we can be a little different. We can charge perhaps 10% for 1 or 2 years. If they pay off the loan as agreed, we'll have all our money back PLUS the Option PLUS THE interest. We will have recorded a MORTGAGE on the property which will secure both the promissory Note AND THE OPTION. That's not bad, but maybe we could even make it better.
We could sell our Note into the secondary market and keep the Option. in a rising market to hedge inflation. Or, in a falling market, we might decide to sell our Option and keep the Note to generate needed income in a business recession. The mortgage on the property protects it against future liens, and to some extent, a subsequent filing of bankruptcy by the owner. Furthermore, even without a mortgage filed in the public records, the IRS will recognize a legitimate Option as a prior claim if it has been recorded.
There are a couple of other topics which me should mention at this point. A distressed owner might decide he'd rather sign a Note and Mortgage or Deed of Trust and just borrow sufficient funds to cure the default, rather than signing an Option. The Note and Mortgage could incorporate a transfer of his REDEMPTIVE RIGHTS which would act almost like an Option. In states where someone who's been foreclosed has the right to redeem the property from the person who bought it at the foreclosure sale, the Mortgagee would then be able to raise the money to buy the property. Or he could just sell those rights to a third party – perhaps even to the successful bidder at the sale.
Finally, suppose a distressed seller would happily sell the house to raise some cash, but a Due-On-Sale clause kept buyers from assuming his loan. You could LEASE the property, pre-paying the lease to provide funds to him to cure his loan default, and include an Option to buy along with the Lease. You'd record the Lease together with a wrap-around mortgage to protect your title. The mortgagee would be none the wiser.
