The former owner will not be able to borrow the money to repurchase his or her home right away.
The only way this strategy works is if you are the lender for the former owner. This is usually accomplished through something called a bond for title, contract for deed, or land sale contract. They are all pretty much the same arrangement.
The former owner, as the purchaser, pays a modest down payment of around 5% of the value of the property. He or she then makes monthly rental payments higher than market rates. If he or she makes all the monthly payments on time, the seller gives him or her a deed at the end. If the buyer misses a payment, he or she is evicted. There is no time-consuming foreclosure. Bankruptcy laws often cannot cure the default and preserve any equity in the property.
As generally practiced, this is a very predatory and heavy-handed way of selling properties. I know someone who pursues this strategy because, as he says, “Most buyers will default in the first six months, forfeiting their down payment.”
He makes a tidy profit on forfeited down payments. He says that he at least gives former owners a fighting chance, which is more than their lenders were willing to do. Some former owners actually pull it off, recover from their financial setbacks, and are able to obtain regular mortgage money to buy out of the bond for title. Most do not, though.
Many states severely limit the practice. Others give consumers rights similar to those held by mortgage borrowers. Before heading down this road, make sure you know your state’s consumer protection laws in this area.