The penalty fee is the same regardless of how much time has passed since the auction, so the investor can earn a 25 percent profit in two days or two months.

One thing to consider, there is a high possibility switching to a 30 year mortgage will only reduce costs enough to avoid a negative cash flow.  

These the exact things I am looking for to help reduce my risk.

Even though the price may be below his ask point out that the the total value of the payments he will receive will be much higher then his ask priceNote:  If you do make an offer for owner financing make sure to include a right of first refusal on the note so that if he decides to sell the note at a discount you can buy back your own own at a reduced price.

If investor is more sophisticated he can invest in 1st trust deeds at 65% LTV and earn 6% to 8%.

@shanel, To protect yourself as a tenant buyer, I would first go down to a mortgage loan originator with a 1003 application which is a standard federal mortgage application, and ask him her how does my credit,  income history, FICO, debt to  earnings look to you?

Maybe a reduced rent will be incentive enough.

We require 25%, but will allow you to bring 15% of that from another investor in 2nd position, which reduces your own cash down to 10%.  

This approach weeds out the tenants you don't want and reduces the number of bogus showings (e.g. people just tire kicking).  

Also, real estate management firms can earn the Accredited Management Organization (AMO) accreditation.