Here's the scenario: for whatever reason (illness, divorce, job loss, etc.) you are behind in your mortgage payments and are facing foreclosure.  The Notice of Default has been filed and suddenly there are strangers knocking on your door and calling at all hours of the day, not to mention your mailbox is crammed full with investors willing to ‘save you from foreclosure'.   

You want to stay in your home but you don't have the money to catch up on all those back payments.  Now what?

Enter an investor with a seemingly great plan:  the investor offers to buy your house, catch up on the payments or refinance the house; the investor agrees that you & your family can stay in the house and make payments to him.  What a relief!  You don't have to move.  But wait, there's more.

This investor agrees to allow you to buy-back your house in a year or two.  His pitch is that this will give you time to get your credit straightened out and then all you have to do is simply get a mortgage and buy-back the house.  Sounds simple, right?  Wrong!

This foreclosure solution is often referred to as a Buy-Back.  Buy Backs are illegal in some states and in many areas, not enforceable in court.   Buy Backs are structured similar to a standard lease option.  Basically, the optionee (the homeowner) has an option to purchase the property (your home) at some future date and (usually) at a specified price.  

A few reasons buy-backs go bad:  (1) an unrealistic term, it is highly unlikely a person can get their credit cleaned up enough to qualify for a mortgage in   12 or 18 months.  It's possible but not probable. (2)  There is little or no grace in the buy-back agreement - e.g. I saw one agreement wherein the homeowner/tenant had to have payment to the investor by 5 p.m. on the due date - absolutely no grace period.  If the payment was late, even once, the buy-back agreement was void and the homeowner/tenant forfeited the right (option) to buy-back the property (3) the specified purchase price is unrealistic and doesn't allow for changes in the market.  I know of a buy-back that was structured for the homeowner to buy back the home at a value set in 2005 - here we are in 2007 - that house won't appraise and the homeowner will lose her $30,000 equity.

All Buy Backs are not bad.  I have structured Buy-Backs that have resulted in a win-win situation for all.  The homeowner does get to stay in the home, the foreclosure is stopped, the homeowner buys the home back, and the investor makes money. (You'll have to remember investors do this to make money, investors are not a social or community service program, they are investors)  The sad reality is that about 90% of the Buy Back agreements are set up in a way the homeowner is likely to fail, or default, and lose their home, their equity and wind up being evicted as a tenant.  The investor winds up with the house & the equity. 

Homeowners Beware:  do not try to structure a buy back with out the help of a professional.  Just remember, just because someone has a business card, that doesn't make them a professional.  Protect your equity!