This is a general overview of foreclosures. Each state has its own laws, rules and regulations regarding foreclosures. Please check with your local and state government agencies for more information. Do not substitute this information for professional or legal advice. Vocabulary.

1. Trustor–person who is responsible for paying back the loan.

2. Trustee–3rd party who is responsible for overseeing compliance on all the conditions of the loan. He only takes action in response to a default in the loan.

3. Beneficiary–the lender; he is listed in loan agreement.

4. Senior loan/lien–the loan/lien that holds first position in the repayment of loans. This loan has precedence in the event of a foreclosure action. The senior loan is the first loan recorded and filed with the county recorder. The loan may be referred to as a note/trust deed/mortgage, depending on the state.

5. Secondary loan/lien–a secondary loan/lien gets paid off after the senior loan.

Summary

The beneficiary who gave the lending institution the funds for the property loan bears the risk of the trustor defaulting. If the trustor defaults on his loan agreement, the trustee forecloses on the trustor's property. Ninety days of grace is usually given in most states, until the notices of sale. A further three weeks to remit the deficiencies is granted after the notice of trustee's sale is recorded. In most states, if a trustor is in default, the trustee has to give notice to the property owner, post a sign at the property, and publish the notice in a local paper. The trustor then has 90 days to bring the loan current and make up the back payments and penalties. If he doesn't pay after 90 days, a notice of trustee sale is filed. After 90 days, the trustor may be required to remit the face value of the note, plus any costs incurred in during the delinquency. This is at the discretion of the beneficiary.

When the auction is held, the buyer must check the county records to make certain which note is offered for sale. To take title to the property, he would purchase, at the sale, note being offered. The purchase of the note is the only necessary legal title that the buyer will need to record ownership of the property. If it is a junior note, the buyer must service any senior notes, liens, and delinquencies, including property taxes and possibly IRS liens.

If the funds from the sale are equal to the then balance of the loan, then all the junior note holders and people with liens junior to the note being sold will have no claim to the property.

If the funds from the sale exceed the note, then the secondary notes are paid back on a historical basis determined by when the loans/liens were recorded at the county recorder. However, the IRS has the option of enforcing their rights usually up to one year after the sale. They would acquire the property and sell it, hopefully at a profit, so as to satisfy their liens.

If there is any money left after all of the notes/loans are paid off, then the remaining balance goes to the trustor. (This rarely happens.)

It is worth noting that is of utmost importance to know the position of the note going to sale. This can only be determined by the date stamp on the instrument at the county recorder's office. Any subordination agreements must also be considered. It would be a major mistake to bid on a note at trustee's sale, only to find out it is junior to another you were unaware of. As the new property owner, you would be responsible to make payments on that note, or perhaps, if the Notice of Trustee's Sale were published, be required to pay the entire amount of the note, past due interest, expenses and principal.

Buying and selling seconds in the market is a business in itself. A company buys seconds at a discount from the outstanding balance of the note. If an investor believes that his secondary note will be paid off at the foreclosure auction with an overbid, he will try to buy the second from the beneficiary at a discount. The beneficiary, in many cases does not want to inventory the property and/or take the risk of loosing the entire amount of the note at auction due to a senior note going to sale. Beneficiaries often sell the second lien at a discount, and even at a loss.

Investors who are confident that a property will receive funds sufficient to satisfy the second lien at the trustee sale can make money, but also take on a high amount of risk. If you are interested in this type of investing, you must be absolutely sure of the position of the note; do extensive research of the public records, and attempt to determine a quick-sale value of the property.

note: Broker "vultures" — when someone defaults they come in quickly to try to sell–this saves the person's credit rating when the outstanding balance is paid off, but the trustor usually looses the equity he has in the property.

Typical Loan positioning
1. IRS lien
2. 1st position–home loan
3. 2nd position–home equity loans
4. Mechanic's liens

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Lease option sales were popular financing instruments in the late 1970s and early 1980s. They were primarily used as a way to circumvent alienation clauses in mortgages. Proponents claimed the sale was not really a sale because it was a lease; however, courts argued otherwise.

Today, options to purchase, lease options and lease purchase agreements are three different financing documents. The variances are state specific and not all states have identical laws. Before entering into an agreement with a seller, buyers should obtain the advice of a real estate lawyer. The information below is an overview and is not meant to be construed as legal advice.

Basics of an Option

* Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial or as little as $1.

* Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the option.

* The term of the option agreement is negotiable, but the common length is generally from one year to three years.

* Option money is rarely refundable.

* Nobody else can buy the property during the option period.

* The buyer can sell the option to somebody else.

* If the buyer does not exercise the option and purchase the property at the end of the option, the option expires.

* The buyer is not obligated to buy the property.

Basics of a Lease Option

* Buyer pays the seller option money for the right to later purchase the property. The lease option money may be substantial.

* Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the lease option.

* During the term of the lease option, the buyer agrees to lease the property from the seller for a predetermined rental amount.

* The term of the lease option agreement is negotiable, but the common length is generally from one year to three years.

* The option money generally does not apply toward the down payment.

* A portion of the monthly rental payment typically applies toward the purchase price.

* Option money is rarely refundable.

* Nobody else can buy the property during the lease option period.

* The buyer generally cannot assign the lease option without seller approval.

* If the buyer does not exercise the lease option and purchase the property at the end of the lease option, the option expires.

* The buyer is not obligated to buy the property.

Basics of a Lease Purchase

* Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial.

* Buyer and seller agree on a purchase price, often at or a bit higher than market value.

* During the term of the option, the buyer agrees to lease the property from the seller for a predetermined rental amount.

* The term of the lease purchase agreement is negotiable, but the common length is generally from one year to three years, at which time the buyer applies for bank financing and pays the seller in full.

* The option money generally does not apply toward the down payment.

* A portion of the monthly lease payment typically applies toward the purchase price.

* Option money is nonrefundable.

* Nobody else can buy the property unless the buyer defaults.

* The buyer typically cannot assign the lease purchase agreement without seller approval.

* Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.

* The buyer is obligated to buy the property.

Doing a Lease Option / Lease Purchase

Hire a real estate lawyer to draw the documents and explain your rights, including those of possession and default consequences. The property might be encumbered by underlying loans that contain alienation clauses, giving the lender the right to accelerate the loans upon sale.

Sometimes sellers give the option money to their real estate agent as full payment of commission. Agents are not always involved in the exercise of lease options or fulfillment of lease purchase agreements and, even if you have retained real estate agent representation, you still need a real estate lawyer. Agents are not lawyers and cannot give legal advice.

In the event of a lease purchase, obtain all the disclosures and do your due diligence just like you would on a regular sale. This means:

* Get a home inspection.
* Examine the title policy.
* Obtain an appraisal.
* Read seller disclosures.
* Consider obtaining pest inspections, a roof certification, home warranty plan and hiring other qualified inspectors.

Lease Purchase Benefits for Sellers and Buyers

Lease purchase agreements are commonly offered by sellers of hard-to-sell properties. Think about it, if the property was easy to sell, the seller would sell it to a conventional buyer who would pay the seller cash.

* Sellers generally get market value at today's prices and relief from paying a mortgage on a vacant property.

* Although the lease payments may exceed market rent, the buyer is building a down payment and banking that the property will appreciate beyond the agreed upon purchase price.

* Buyers generally make a small down payment, with little or no qualifying, making a lease purchase an attractive way to ease into the benefits of home ownership.

* Buyers also receive a forced savings plan since part of the lease payment is credited toward the purchase price at the end of the lease option agreement.

* If the buyer defaults, sellers do not refund any portion of the lease payments nor the option money and may retain the right to sue for specific performance.

For more information, contact a real estate lawyer.

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