How to proceed with pre-foreclosure

[David Alyea]

Hi all,

This is my first attempt at buying a pre-foreclosure house. The first step went amazing well, but now I'm not sure how to proceed. I thnk it's a deal, but please help me to decide.

I saw the notice of default and drove to the neighborhood and talked to the owner who happened to be in the front yard getting his paper. The conversation went great, and I was clearly the first one to talk to him. I know from the notice that the first mortgage is $144K and that the house would sell for about $215K so there is lots of room. He knows, as he said in the conversation, that his house appraised for $179K 3 years ago and that there are other houses in the area in the $210K+ range. But he's in default, so... I think a fair price for both of us is about $185K. He gets out of trouble and pockets $40K (I don't know if there is a 2nd or 3rd position or back taxes at this point) and I get a house with $30K in equity. Now that I just typed that, I suppose $180K is a more fair price!

How do I proceed to get this property? I figure there are three options:

(1) get an agreement from him, get it inspected, buy it for cash - that would be ultra-fast and get him out of trouble - only of course I don't have $180K lying around

(2) help him get paid up for all his debts in exchange for him selling the house to me, and then I get traditional financing - what are the exact steps here, though?

(3) I get him paid up, and then we have a legal agreement that we "co-own" the house and he has to keep making payments, and if he doesn't, I can buy the house for a pre-determined price if he gets behind again - I read about this somewhere, but it's not clear how this would work to me

I'm leaning toward (2), to draw up a legal document saying that he is selling the house to me, and at the same time, pay off the bank for him and get everything level so that the sale can go through and I have time to get conventional financing.

Any ideas? And does this look like a good deal?

Thanks-
David