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||Is this a form of fraud? =^)
||Suspect, suspect. A few thoughts:
It sound like the property owner is also the lender here, this is commonly called a leaseback arraingment. The renter, also in this case the lessee, pays premiums to the property owner for the lease. Typically, what the property is mortgaged for in installments plus 10-12% APY.
An excellent choice for the secondary residence that may be exempt from favorable tax treatment and part of a portfolio. There may be a problem with the loan term since the tax treatment will likely be found in accord with depreciation time, and after the first 10 years or so of the loan it would clearly be that mortage interest will far outstrip ROI potential for the property.