The 3rd option is to do a lease option on it to save myself on taxes when option hopefully exercised in a year.  

Allow the property to go into foreclosure and then once the property gets purchased back by the lender and then sold to a 3rd party exercise the TOPA (Tenant Opportunity to Purchase Act) rights with his current lease to block anyone else from purchasing. 

If that is the case that would be a good option to exercise, or you can pay off the second like it was person debt and keep the house.

I figured I could get the house on terms and make a profit from the option fee and possibly monthly cash flow, then money from the sale at the end of the option of the tenant chose to exercise the option to buy.

It's all about actively telling yourself to take a long-term perspective and chomp away - one bite at a time (easier said than done, but  a great exercise nonetheless). 

On day one they setup an exercise to improve your credit by calling and asking for higher limits as homework (This way your ratio of available credit is better).

They will exercise this strategy and then convert the property into their primary residence. 

I guess the only real conclusion of this exercise is do your numbers in your market, figure out what your goal is going to be and what it will take to get there.

For a fun thought exercise, I'd look at what kind of a real estate investment you could make with a $55,000 investment. 

Person has contacted me as a hard money lender to exercise the LO and purchase it outright.