Need help financing 2x MFH properties

[Joshua Morgan]

Hi BP,

I'm in negotiations with a seller on an off-market deal to purchase 2 MFH buildings on the same street. There aren't any other buyers competing with me (at least yet). Here is the situation:

Property A:
4-units
Current gross monthly rent: $2800
Reasonable monthly rent projection: $3000-3200
Asking price: $305k

Property B:
5-units
Current gross monthly rent: $3295
Reasonable monthly rent projection: $3550 - 3800
Asking price: $360k

Both properties are at ~8% cap at these asking prices.

Seller owns both properties free & clear and lives next door to Property A. Property A he has owned for 3-4 years and Property B he has owned for ~35 years. He also lived in Property A for ~2 years within the last 5 years (though he's been told by his CPA that he likely won't be able to avoid *any* capital gains because of the way his previous returns were filed. Not sure on the details why this is. Neither his nor my CPA is available for further discussion until after 5/17 next week)

My wife and I have about $20k cash which is enough to get FHA owner-occupied financing for at least 365k. We would also qualify from an income standpoint for traditional financing for both properties, but cash for downpayment is the issue as 25% down is required for 4-unit building.

Seller is willing to do seller financing on one of the properties, but his concerns are:
1) Not losing money compared to an outright sale and dumping funds into stock market
2) FHA inspecting his unpermited 5th unit. The county/city zoning board has said this unit is not an issue and is grandfathered in, but he's worried about the more stringent FHA appraisal/inspection
3) Buyer "skin in the game" - doesn't want to be left holding the property again as this has happened to him at least twice on previous land-contract/CFD arrangements
4) Ability for buyer to acquire traditional financing at balloon
5) Effective total cash to the seller is a primary driver

We submitted an offer that solves all these problems:

Property A:
Purchase price: 360k using FHA loan, owner-occupied

Property B:
Purchase price: 305k, 0% down, 25 yr amortization, 5 yr balloon, 4% interest rate
Note + mortgage arrangement with professional loan servicing/escrow

Assuming a 9% annual return in the stock market, this arrangement is equal in total cash to seller (including accounting for inflation,etc). Further, FHA never sees Property B w/ 5th unit in this deal, and if Property A successfully appraises for 360k today, then Property B should comfortable appraise for the required value in 5 years at balloon. The "skin in the game" issue is handled because the deal really only works if *both* properties are on our portfolio (at least until we can refinance out of FHA and seller financing).

Seller likes this offer, but is now realizing he'll have a substantial capital gains and depreciation recapture tax bill from selling these. He's considering doing a 1031 exchange into a vacation home. This works fine for Poperty A w/ FHA financing. I know a 1031 is still possible under the installment sale, but honestly I don't see the seller going for this with its extra complications. I can't think of a way for him to still leverage the 1031 exchange on the sale of Property B while doing seller financing (or otherwise me securing financing for the 2nd property with the limited available cash)

My question is:
Anyone have any unique or creative solutions for how to acquire both properties with the cash I have? If I can come up with a way to offer an outright (non-installment) sale for *both* properties, we're in business and I'll have a great addition to our portfolio. Thanks in advance!