Creative Investing Scenario and Questions

[Aaron Fox]

*Sorry for the long post, but we'd appreciate any feedback we could get! Thank you in advance!*

My partner and I found a property that we believe we can do some sort of subject to, lease option or some other form of creative investing. Without giving out too much of the details, the home is worth $250k and they have a mortgage of $150k. Their monthly payment is $1,200 and we believe we can get $2,000 in rent. They have been trying to sell it for a while now with no luck and we believe it's because she is asking too much since it has a crawl and will need a new roof soon. However, she is open to the idea of creative investing. She already has a home and does not need to sell right now. It is a beautiful home and one we would love to have and could easily rent in a highly desirable area.

We are trying to figure out the legality of doing this deal. So what we are trying to offer is that for 3 years, we will rent out the property and give her a monthly check to cover all of her expenses. We would collect the spread between her monthly payment and however much we rent it for. We wouldn't give any down payment or monthly payment (besides the amount covering her monthly payment), she would just be able to continue writing off her interest payments for the 3 years. Then in 3 years, we would sell or refinance and give her the full amount of equity that she has today. So we would get the cash flow for renting it and any equity that is built up over 3 years. 

Basically, we are locking her in at the equity she currently has of $100k that she will get in 3 years, which is roughly 20-25% more than she would get today because of commissions, closing costs, etc. We are also going to cover her closing costs in 3 years and cover any expenses like the roof or other repairs along the way.  If she were to sell today, she would be paying realtor commissions and closing costs which could bring her cash proceeds out to about $80k.  This is also assuming that a person buying today wouldn't ask for sellers concessions for the roof.

The reason we chose 3 years is so she doesn't get hit with a capital gains tax. She has lived in it for the last 2 years and if it sells in 3 years, she wouldn't get hit with it because she lived in the property for 2 of the previous 5 years. 

Below are some of the questions we need to get figured out, which is where we would love to hear some feedback from you guys!

1. Would we be able to structure this deal in this fashion so that in 3 years we can sell or refinance and she won't get hit with capital gains tax? If this structure can't be done, what else could we do that would be similar?

2. How would we insure that both her and us are protected? Let's say someone were to fall on the property, neither of us wants to be liable.

3. Would she keep her insurance and add us as additional insured or would we get insurance and add her as additional insured?

Again thank you so much in advance for any help you can give us!

Aaron