Buying grandparents home, how to finance

[Zane Cress]

Starting the conversation about buying my grandparents home in the mountains. They own all their assets outright and will probably remain in the property for another year or two. My rental properties kick off enough cash to cover buying their place now while they still live in it and floating the extra cost for a few years. After they leave it will become a STR that will cash flow nicely and I can refinance it for a decent cashout.

Option 1 is get a conventional mortgage and charge them rent to cover the monthly cost however long they stay there. I can give them a higher purchase price if they will cover the monthly cost for the next few years. They get the tax free gain in the meantime to live off of. Getting a 7.5% rate with buying points at 80% LTV. Most likely they would sell to me at the 60% value mark so maybe the rate gets better.

Option 2 is do a seller finance option where we work out terms for a few years at a cheap monthly payment and do a balloon payment at the end when they are ready to move out. My question here is about the tax implications. If they seller finance for 3 or 4 years and then take a balloon payment does it still qualify for tax free primary residence status?

Option 3 I rent it from them for a couple years at a cheap monthly rate and then buy at a reduced price later on since a primary residence you only have to live in 2 of the last 5 years. 

Open to any other scenarios people may have here. Looking to give them money now and secure the asset without doing any wills that could be argued later on in court.