have a rental property,need to short sale or foreclose,advice please!?

We have a rental that will be empty at the end of Feb,our tenant cannot afford the pmt any longer.We aren’t making any money off him,just paying the mortgage on it,and although he has been a good tenant,he almost moved out back in Sept/Oct due to money problems.We can’t do anything for him as far as lowering the pmt,since as I said,we aren’t making a profit and I don’t see the mortgage co. doing a refi on a rental to save about $ 40,which won’t help him at all.We can’t even afford to cut $ 100 or so off the rent and carry him for it,we couldn’t pay our own house pmt if we did! It’s very nice inside,due to all the remodeling,but would still be a short-sale,though,due to the market and the fact of it being an older,albeit nice,mobile home.We outgrew it and couldn’t afford it,so had to live with family while we saved money to put towards a new place.The thought of renting it out again after he leaves is scary.We didn’t want to do it the first time,but felt like we had no choice,the market being the way it was,etc. He just happened to be in the right place at the right time,with enough $ $ $ to cover rent and the pmts that we were behind,with the understanding that it was NOT a deposit and he would NOT be getting any of it back if he broke the lease.We have offered him 45 days to leave,rather than the standard 30,since that will make up for the money he put down towards it,thinking to eventually qualify to buy it through assumption (it’s FHA) of our loan or get his own loan.I don’t know whether it’s better to try and get a short sale approved (upside down 20-30k,is my best guesstimate),let it go into foreclosure (credit is shot anyways)or do a deed-in-lieu,if we can.We have been advised by a realtor friend not to try for a short-sale because of the market here,plus he says the lender WILL sue us/obtain a deficiency judgement (our state does permit them)BUT, we do have PMI because of it being a HUD/FHA loan.We know we aren’t going to make any money off the sale,and we don’t care.
Our main concern is-#1 ,taking care of this in a way that will satisfy the lender so that they won’t sue us fit to break us/cause us to lose our current home,which we are buying through owner financing and worked very hard on just to make it livable.We can just make the pmt here now,with our income and only b/c OUR landlord/seller is VERY good about letting us split the pmt,whether it’s 50/50 or 60/40 from month to month.He can do that,b/c it’s his,free and clear.If WE had an extra $ 100 to comfortably spare we would cut rent for OUR tenant and spot him that $ 100,at least for a little while.(I don’t think they can’t take our new house from us/put a lien against it,b/c it’s not in our name yet)
#2,letting the house sit vacant while it’s up for short-sale/foreclosure,since it’s not in the best neighborhood. We don’t want to be responsible for damages/vandalism,but we are not going to let our tenant have a free ride.We already told him that if he is indeed moving,use the next 45 days to save up all his money towards his new place.We told him we do not expect rent during this time( if he can’t pay the Jan rent,why would he pay Feb and still have money towards a new place,right?),nor will we come after him for money when he leaves after the 45 days,so long as he doesn’t damage/trash the place.Is that fair?We think so.We don’t want the stress of renting to someone else after he leaves,being a month or two behind b/c of our current tenant NOT staying current,with the mortgage co. breathing down our necks,or sticking it to any new tenant,which I feel is just not right.We realize we’ve made some mistakes,but this was our first (and hopefully last!) experience as landlords.We made sure we weren’t committing ‘buy-n-bail’ before we ever signed the papers for his rental/lease agreement,or the papers on our new house,we made sure we had him signed as a tenant,moving his things in,before we moved all our things out,so they couldn’t claim we were abandoning the property.
Should we let him stay there.and just be one month behind,gradually trying to catch up,hoping he can keep up?This is,after all,the second time in 6 mos.,and while we’ve been in his shoes,it’s too nerve-wracking to keep doing. Should we keep him there,for the sake of having the property occupied and hopefully deterring damage/vandalism? We don’t want to let him squat in it,just saving money towards a new place,nor do we feel comfortable collecting partial payment for a place that will be lost or sold eventually anyways.We know we can’t be the only people in this sticky situation,but it feels hopeless and stressful,like we are doomed no matter which way we turn.It was a win-win situation in the beginning-we got to move in with family and save up for a place we could afford,he got to rent a place that was $ 50 cheaper a month,with a 2-car garage and

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