If the deal is too thin to support a hard money loan and/or there is not enough borrower skin in the game to recoup your capital if things go awry, then you can lose money just like any other investment where capital is put at risk to earn a return. 

I am speaking from experience and watching countless investors lose out on low end rentals.

Under my scenario, they can keep their equity but lose their override.  

You may have been brought up in a situation that limited your understanding of your potential, but it's time now for the past to lose its hold on you. 

Your money in the deal shows you trust your own ability to complete the project and shows the lender that you have something to lose if the project takes a wrong turn.

As a Realtor, Here is my advised IF you do decide to wholesale and and are reported for "equity stripping" you will lose your license and get fined heavily.

If bank is smart they will know that they will lose more money by going through with foreclosure versus shorting it to him, no?

I would expect you might lose money on this one.  

You lose 6 months time of cash availability (perhaps 4.5 months since it does take time to get the refinance) where you may have been able to buy 2 or 3 more properties in that same 6 month time frame using my method rather than buying with cash.With my method I pay no lending costs with my first purchase since I use loan documents already created by an attorney for another loan for which I participated. 

You can be nice and cordial, but you will lose big time if you put your heart in to this venture as your tenants will tear you up emotionally and financially.