I'm looking at a long, skinny rowhouse that's currently configured as a 2 unit, but could probably be reconfigured for three units for either rental or condo conversion.Several of the existing bedrooms have their only window into a shaft that I'm pretty sure was put there explicitly for the purpose of allowing light into the house.  

The short sale documents will contain an Arms Length Affidavit stating there are no agreements between the two of you, and specifically that the owner can't rent the house back.  

One thing that I don't think was brought up is fair market rent and arms length transactions.  

My girlfriend says that she's done with fostering for a while, but, well, I've heard that before, so it never hurts to be armed with a little bit of knowledge.Again, thanks!

The sale of a property can trigger a re-assessment (depends on jurisdiction) so you do need to research this and if it will, the sale price assuming an arms length transaction, will be come the FMV which will impact the taxes.In analyzing a number of opportunities, I have seen deals that appear 'good' but which degrade to 'not good' just based on the 'likely' change in property taxes.You have to know the local jurisdiction laws and make sure you keep this in mind when running numbers.

But being a true beginner as I am the people are more important and the trading community in Lenexa, Ks took me in with open arms more quickly. 

Scott The Book on Flipping Houses, The Book on Estimating ReHab Costs http://www.biggerpockets.com/flippingbookTo find out about an area go to IREM.org search for ARM certified property managers.

Type of mortgage - fixed or ARM?

The bank said they wouldn't do it because it wasn't an "arm's length transaction."

I'm not sure you are considering factors such as, off the top of my head: 1) unlike the have-a-pulse-get-a-loan scenarios of yesterday, they are required to have proper debt-to-income ratios and meet reserve requirements so as long as they don't lose their job for an extended period, they've proven they can afford the payment; 2) even in a down market, they will have to live somewhere, so unless rents are much cheaper, which is unlikely, it makes more sense to not ruin their credit, keep paying and stay where they are, especially if they've improved the property at all; 3) these loans are much more likely to be 30-year-fixed, not the ARMs of yesterday that adjusted up to a surprisingly unreasonable payment (many didn't understand what they signed up for until, Wham, the payment doubled on them, so they had to walk); 4) they pay MIP, upfront and monthly, so there is some protection for the lender if they do default.Many of these people would be stuck paying much higher rents, building others' equity instead of building their own, without FHA loans.