Bid High Pay Low - Really?

[Chris Luksha]

Background ....

I have the opportunity to finally purchase my next home and convert my existing into a SFR. A friend of mine from teenage years (about 35 ago) is getting rid of his parent's home since his dad is going into long term care. The background is just to say it pays to always tell people when you are interested or that you are even on the lookout in general. I mentioned wanting to invest in the home over 2 years ago.

Anyway, he wants to sell me the home for $80 in order to help keep his dad out of medicaid for a few months. Because of this he is not willing to seller finance but is certainly willing to leave me anything in the house I might want to sell etc. (probably only about $3k in large woodworking tools and a small upright piano in great shape.)

.... End Background

In talking with home about creative financing he mentioned to me that when he sold his home just next door, he listed it for $175k and the prospective buyers came in and offered him $198k. In effect trying to over value the home to the bank as they were qualified for quite some amount so long as they had 20-25% down. When they did finally buy the house at the asking price of $175k, the bank supposedly gave them two checks, one they used to pay for the house, and one had back to the bank in some way for the down payment or the remodeling, he was not sure exactly what happened.  But the total amount the bank gave him was $198k

With that little bit of information, can anyone tell me what it was that home owner did? I don't know all the exact details. My friend has said he asked about it years ago and was given hard core "What they did borders on fraud" and hardcore "This goes on every day. Banks know what it is and wouldn't do it without knowing they were getting their money back."

Anyway - I would be purchasing the home as my primary residence, remodeling it considerably to fit my wife's desires, an then subsequently renting my existing home.  

This is all finally in the realm of possibility and my wife after many years is on board with the prospect of owning a rental property, so any and all guidance is greatly appreciated.  Thank you all so much!

Chris

Sales Price: $80k

3/1 cape with addition of garage and breezeway converted to kitchen and dining.
1212 sft

Town Valuation: $120k
Redfin: $149k
Zillow: $165k

Rehab costs : ~$25k to do what my wife wants. We can pare it down because it truly only needs cosmetics to start and I am a contractor so will do as much as am allowed.

Conservative ARV: $130-$150

Private sale