Lease Option for Homeowners Behind on Payments

[Brooks Rembert]

I've heard of folks buying houses from sellers who've fallen behind on their payments, then leasing the house back to them to avoid the pain of moving, etc, but another idea came to me, which I'm positive is not an original thought. I know the experts here on BP will be able to tell me if I'm smoking some funny stuff.

The idea is; why not do a lease option for these very same sellers?

I would envision the deal going something like this:

Identify sellers at risk of foreclosure. Maybe they've gotten a month or two behind, gotten some nasty letter from the bank etc. To use round numbers, let's say they owe $100,000 and their original mortgage was worth $160,000.

Let's say the PITI on their loan is approximately $875, plus or minus $50 per month.

The buyer could come in and offer them $120,000 for their home. That would pay off their mortgage and leave them with $20,000. 

At closing, the seller would immediately sign a lease option with a $10,000 option payment to buy the house back from you in one or two years for $130000. Their lease during that time is, say, $800 per month, saving them about $75 per month.

They get to stay in their home, pay rent totaling $9,600 for the year, then buy the home back for $130,000, with the $10,000 option payment applied to purchase, meaning they are essentially buying it back for $120000; what you bought if for.

Financials

$120,000 with 20% down equals PITI of about $720 per month. Cash flow from rent of about $80 per month, or rounded up to about $1,000 that first year.

That $1,000 plus your $10,000 option payment equals $11,000 on a cash outlay on your part of $24,000 (20% down on $120,000) plus say two months of catch up with the bank equaling about $1,800 for a total return of $11,000 on $25,800.

By my math, that equals a return of 42.6%

Is this legal? Does it make sense? Am I missing something? 

I'm looking forward to your comments...