I have a seller who is interested in renting back the property from the new buyer on a short sale, is this ok?

Is the Buyer mortgaging the purchase?

If so, is his Lender okay with turning control of the collateral over to a Tenant?

paying cash, but what about if an investor buys it with a non-owner loan?

A new buyer is free to rent it to anyone they wish provided that the purchase was an arms length transaction when consumated and they did not represent that they would be an Owner Occupant of the property.

Grampa is correct, assuming he is stating in his contract that he will be purchasing as a non owner occupant. The seller's bank is only concerned that the property was marketed fairly and that they are getting whatever net amount the require. After that, they aren't concerned. Remember, if in doubt, just ask your loss mitigation contact at the bank.

A realtor that I know had an experience where on the arms length transaction form that all parties sign, it stated that the new owner was not allowed to rent the property to the seller. I have not seen this, you must read the forms carefully.

Planning to rent the property back after selling is NOT an arm's length transaction...no no no!

If the buyer is not related to the potential tenant what is the issue?

If I had a potential tenant (even if the prior owner) it would make a difference in my choice to buy.

The bank can not dictate who you rent to after purchase. If you were reselling it to the former owner I could see an issue but not for a tenant agreement.

Probably ok, but not a good idea. If the sellers couldn't pay the mortgage, they probably can't afford a market rent either.

If they hid all their cash to set this up then they can probably pay the rent or live rent free if connected to buyer. Lots of people taking advantage of this economy.

I attended a Wells Fargo class yesterday. It is not arms length transaction for Seller to rent back.

The key here is prior knowledge and intent. If the buyer is purchasing the home with the intent to rent it back to the seller on a short sale then it is not a fair arms length transaction. The question is, what are the ramifications if it occurs? That all depends on whether or not the lender accepting the short sale investigates afterward and finds the seller living in the home. If they don't probably nothing. If they do then the short sale agreement has been violated and both the buyer and the seller could be liable for any deficiency caused by the short sale. If you had knowledge of this prior to the closing then you could also lose your license and be subjected to other penalties. There are too many available properties out there to step into the middle of this one. Don't do it!