A successful short-sale typically benefits the borrower (homeowner) in the following ways: it can give them more time in the house (and payment-free); it is better than a foreclosure from a credit report perspective and wold allow him to obtain a new purchase loan for a new home in the future more quickly as compared to having it go through foreclosure.I would encourage you both to reach out to a local realtor with short-sale experience and have them facilitate the transaction, it would not cost you or the owner the commission as it would be paid out of the bank's proceeds.No, in a short-sale I would definitely not offer any payments to him directly that are not known and approved by the bank, you can get yourself in hot water and probably legal trouble by doing that on a short sale.

You do not want tenants to pay these bills as your property can go up for auction, liens ruining your credit.

Bad credit precludes lenders that you suggest.. 

I’ve got excellent credit but am short on cash with just $30,000 in savings.

2) A local, small town bank/credit union?

Anyone in the Milwaukee, WI area know of a bank or credit union that will do a HELOC on a rental property (not owner-occupied)? 

Don't sell your home, just get a Home Equity Line of Credit (HELOC).

My first deal wasn't great, but it wasn't terrible. 

Is 8% a terrible number for vacancy?

That won't help your credit but at least you'll feel better (Probably not) knowing she has the liability.