When landlord nears foreclosure, renter must be cautious in buying

Q. I have been renting the house I am living in for about four years. Last month, when I paid the rent, the owner told me he has to sell the place because he is behind on his mortgage payments.

I have some cash, but I cannot qualify for a loan right now due to a fairly recent bankruptcy and some other issues. I have been told I could qualify for a loan in about a year from now.

I would like to make the owner an offer for the place which allows me to stay here until I can qualify for a loan. Any thoughts?

A. I have a couple thoughts; however, everything starts with how much money will it take to bring the owner current. If you cannot accomplish that, nothing else matters. Also, determine how much equity the owner has in the property. The more equity the owner has in the property, the more likely whatever agreement you make with the owner will go according to plan. If the owner has no real stake in the proceedings, there is no motivation for the owner to honor your agreement.

Presuming you can raise the funds to bring the mortgage current, one possibility would be a lease option. You sign, say, a two-year lease with an option to buy. You decide on the sale price today. You also attempt to negotiate all or part of the rent as a credit against the purchase price. You bring the mortgage current and you receive a credit for that amount at closing. Before the option expiring, you obtain your loan and close. You will have accrued equity in the property through your original payment to the mortgage company and any rent payment credit you were able to negotiate.

Another possibility would be a contract sale. Again, you would negotiate a sale price and you would make a "deposit" of the amount due the mortgage company. You negotiate an interest rate on the amount you have financed with the seller. For example, say you agree to a sales price of $200,000 and the seller owes $10,000 to the mortgage company. You pay the mortgage company the $10,000 and finance $190,000 with the seller. Maybe the loan is interest only, maybe not. There would be a "balloon" date, meaning a date that you would be required to obtain other financing, such as with a mortgage company and pay the seller the balance owed him. Obviously, the longer the balloon date, the better for you as it increases your flexibility. Also, it would be preferable that your payment to the owner is less than his mortgage payment.

In both the above instances, in the event you could not obtain financing by the end of the option or balloon period, you would forfeit the amount you deposited with the seller's mortgage company as well as any rent/payments made. Accordingly, you want to feel very comfortable that you will be able to obtain institutional or other financing within the time frame negotiated.

I would also suggest proceeding with caution and installing safeguards for your protection. The fact that your owner is in a foreclosure situation indicates that he or she has severe financial problems. It is very dangerous to enter into one of the above agreements and then start depositing large checks with an owner in foreclosure. The owner could be in such terrible financial shape that he or she could take your checks and rather than keep the mortgage current, use the funds for other purposes.

I have a couple suggestions to protect your interests in the event you move forward with purchasing/lease-optioning the property. One is to record a memorandum of your agreement. This would prevent the owner from selling to someone else after he takes your cash. Two, you want to somehow ensure the mortgage payments are made on time. One possibility is you obtaining money orders each month for the mortgage payment and sending them off yourself. If your lease/option or installment payment exceeds the owner's mortgage payment, you would simply write the owner a check for the difference.

Of course, I would suggest you retain an experienced real estate attorney in the event you elect to proceed in purchasing the property.

• Attorney Tom Resnick's column appears every other week in Homes Plus. Send your questions to him at 345 N. Quentin Road, Palatine IL 60067, by e-mail to tdr100@hotmail.com or call (847) 359-8983.