HELP! Big mistake... Bought 2nd mortgage

[Ashley C.]

In April 2012, I bought what I thought was the primary mortgage in a court auction for $40k. Well, this was my first time doing this (auction, I usually buy from brokers and flip) and it ends up the website I used to do a lein search was crap and I had actually purchased the 2nd mortgage, not the first. Two weeks later, the 1st mortgage went into auction but nobody bid. First mortgage is for $170k. Value of the house is $230k, so at the most, there is only $20k in equity, but it could have been a lot worse, obviously I could have lost the entire $40k.

In Michigan, there is a 6-month redemption period but I've already talked to the homeowners and they are not buying the property back, just want to live there rent-free for the next 6 months. Fast forward to now - redemption period ends in 2 weeks. I have already talked to the bank that holds the 1st mortgage (same bank that holds the 2nd, actually) and they said they would be willing to take an offer for the property.
So my questions are this:

1. How low should I go on the offer to the bank? Anything I should base it on?

2. If accepted, what are my options to pay off the bank? Do I have to pay them before I sell the property? If so, I don't have $75-$100k (or whatever we settle on) in cash so I'm not sure what I'd do!?

Any advice is greatly appreciated!