Being a lender to a friend

[James Denon]

My friend is buying a condo in Cape Cod MA. It is a bank owned property

The pipes are damaged and there is a risk of flooding if the water is turned on. The bank would not let them turn on the water because of this risk. They could not get it appraised to get a loan for the property. They cant even get a 203K loan for some reason although they are first time buyers. I really would like to lend him 80K they need to purchase the property. They have been told the only option they have is a portfolio loan.

We thought of 2 options:

1. I carry a note for 80K as a lien on the property with a payment schedule.

2. I get part ownership of the property and I give him back the ownership when he pays off the loan.

Any thoughts on which is the better option? What would be my income tax obligations under each option when he pays me back what he owes?

I am thinking Option 2 is  better. Since he can pay me on a monthly basis and I can sell him my share of the property for 1$ when he pays back the full principal. Maybe we can create an escrow account and he can make payments to this account on a monthly basis.