Renting to previous owner?

[Stefanie Daugherty]

My husband and I are just starting to get our feet wet in REI in Stockton, California. We are newbies who are reading/listening to everything we can get our hands on (lots of BP content of course) and have put offers on four properties with no luck yet. I'm looking at a short sale whose current owner prefers an investor buyer who he can rent from. The amount he's willing to pay in monthly rent is slightly higher than property management's projections, which means the property would provide a small amount of cashflow for us. Some pros are that the previous owner knows the ins and outs of the property and will likely continue to take care of it. Some cons are that he might be too emotionally invested in the house, which might complicate things when it comes to maintenance, eviction, etc. If we were to buy this property, we should still screen the previous owner just like we would any prospective tenant, right? What do you experts think... put an offer on it or hold off? The property is in decent shape in a decent location with a very low purchase price for the area, so it's tempting.

[Kyle J.]

Something to be aware of when purchasing short sales, the lender will usually not allow the previous owner to remain in the home after the sale. Does it happen? Yes. But it's technically fraud because you'll have to sign an arms-length affadavit agreeing to it before closing. 

I just looked at the disclosures on the last short sale I purchased and it says under Lender Agreement to Short Sale that "they (the lender) will generally require that the transaction be arm's length and that all terms of any benefit conferred on the seller be fully disclosed and that the seller cannot stay in the property following the sale".

Here's some more reading on the subject if you're interested:

Can I Lease The House Back to the Seller After I Buy a Short Sale?

Can a Homeowner Rent Back After a Short Sale?