For example, you completely ommitted advertising, management (even if you do it), maintenance (even if you do it), legal expenses, evictions, setout fees, damage done by tenants (in excess of the security deposit), entity maintenance, utilities paid by the owner during rehabs and vacancies, capital expenses (although not technically an operating expense), lawsuits, etc, etc, etc (I could go on and on and on).The good thing is that you're at break even, so this is not a disaster.

Until they own the property it is not theirs to sell.If the person can not think clearly then they can not legally sign documents.

Not long ago the house was jacked and leveled.I've had a couple friends that have been flipping for years look at it and they both come up with a price of $35-$40K to fix it up.There are some legal issues that have to be addressed first cause there are a bunch of heirs to the property.With that said the price on this house is....are you sitting down???

How can we legally and ethically make up this difference?

Always consult with your attorney regarding all legal matters.Researcher rules1.Make them an officer 2.Make them a partnerTithingIt’s just a fact, the more you give the more you get.Tithing rulesJust Do It!

He must have broke another law somewhere along the line, because buying subject to is legal.

Is there a formal contract format or will any general real estate contract legal in the area suffice?

(You also may be able to sue for legal fees as well, but I don't know)If he didn't return the deposit I personally wouldn't do anything. $139 just isn't worth any more headache.

Even after all that, there is still other things to discuss because deal making is very fliud and there are different pros and cons on the tax and legal sides of each path you take.That's why all the answers from CPAs and lawyers are "It depends."

If you go that route, you should still have a real estate lawyer look at your contracts to ensure they meet your local legal requirements.