Seller Financing Opportunity

[Geoffrey Fellner]

Ok, so I'm definitely a newbie at this, and am sure that I've got a bunch of stuff in here that'll reflect my experience level. I apologize ahead of time if some of my questions sound dumb. So here's my situation: My parents both retired this year, and have decided that they're going to move to Alaska in the late spring of next year. They own their current house (in Columbus, OH) free-and-clear, and were going to list their home for $90K, however they were going to allow me to purchase it for $80K. I told them that I might be interested in buying it as a rental. My wife and I took a little time to think it over, and in that time, they contacted 5 or 6 real estate agents. ALL of these agents told them that they had DRASTICALLY undervalued the house. All of the agents told them that the house could be sold for anywhere between $120-135K, due to all the updates and they had done, and some of the amenities that none of the other homes in their neighborhood have to offer! One agent told them that they could sell it in two weeks @ $130K. Needless to say, my parents were extremely happy to hear this! But now this brings about my dilema... Now, my stepmother is STUCK on the idea that their house is worth $40k more than they had thought (understandably so, I suppose) I realize that I won't be able to get the house for $80k now, and that's fine. Now, I've been trying to put together a seller financing proposal to present to them that'll make sense. Originally, I was wanting to keep the purchase price down around $85K, and give them a larger interest rate (7.5-8.5%) with a 5 or 6 year balloon, in order to make up some of the difference. My reasoning behind this (although I'm not sure if I'm correct or not) was for a couple reasons: 1) It would (theoretically) keep my property taxes down. 2) It would (also theoretically) safeguard me against a market downturn, as I would have a lower principle balance at the time of refinance. One of the down-sides to this, I found, is that the interest that I pay to them would need to be taxed as income, as long as I wanted to claim the interest as deductible on my taxes. Then, (coincidentally enough) I was at work listening to a BP podcast, and the guest said something that made complete sense when I heard it. Lets say I give them a price that's closer to what they would actually walk away with through a traditional sale...but don't give them any interest? That way, they'll still get the same amount every month...but since the entire payment would be going toward the principle, they wouldn't need to have it taxed as income, and I would be paying my principle down substantially before the balloon payment. So, come refi time, I should still be pretty well protected against a possible down-market. Any input on either of these scenarios would be greatly appreciated. Any other options that I might be overlooking? Anything else I'd need to elaborate upon? Thanks!