Forclosure bail-out, then rent back to the seller...bad idea?

[Nelson Barss]

Hi everyone - this is my first post.  I've been hunting for a deal and I may have just found one.  I need some advice because there may be ethical & "bleeding heart" flaws in my plan.  Here it is:

I'm a mortgage loan officer.  Today I got a call from a man who has been out of work for a year, his credit score is now in the 400's, and he is 3 months late on his mortgage. The foreclosure process starts in 3 days!  He wanted to know if there was any way I could help him refinance.  Sadly (of course) there is no way.

He said his house is worth $160k (that's probably a "rosy" ARV...he owes $105k + arrears on a 1st and 2nd) I haven't seen the house, but I'm pretty sure it's a mess - he said the basement flooded and he hasn't fixed it. I told him that he needs to do what he can to avoid foreclosure, and sell FAST! He's going tonight to see if his church can help...

I then told him that I have been looking for an investment property to buy, I can close fast (as fast as my hard money lender can move I guess) and I asked if we can meet at the house in the morning to see if we can come up with a win-win situation that would allow me to purchase the home and RENT IT BACK TO HIM. (I'm planning on using hard money+my HELOC to Buy, Rehab, Rent, Refinance, Repeat..)

He won't pass any tenant screening tests, that's for sure, but I feel like I could probably structure a deal that gives him enough cash at closing to put 12 months of rent into escrow up front.  This gives him time to find a job and start paying rent, or move out.

So here are my questions.

1. Do you see any ethical or legal problems with this plan...

2. Is renting back to the same guy under these terms a terrible idea?  I don't really want him as a tenant, but if I want him as a SELLER I probably have to offer to rent back to him too...plus, I kinda' want to help him out...

3. Do you have a better suggestion for doing this deal smarter?