Buying house for cheap from grandparent

[Jerry Baldwin]

Here's the situation. My grandmother is 93 years old and is in assisted living. She has been renting out her house for the last ten years or so with help from my parents. After finally evicting a tenant they've been trying to get rid of for the last two years, they want to unload the house and we're talking about selling it to me.

The house is valued currently i think around $460k. They're still crunching numbers, but I'm hoping to pay around $315k or less for it. There's a lot of different variables. One of the options I have is to do cash out refinance on my current duplex where we live (owe $100k at 4.25% on 200k house which will then go from owner occupied to full rental when moving into the new house). Obviously there are closing costs involved in that and switching it to an investment property means not necessarily any savings on interest. That way, I could do 20% down and borrow the rest for my grandmother's house. Without the refinance, I have maybe 20k to use for a down payment.

Another option would be to have my grandmother gift some of the equity to my wife and I, which can be $30k total without worrying about taxes. Maybe more than that if you dip into the lifetime gift tax exemption, but I don't know where she stands on that and the total value of her estate. My parents have been handling the house and will be using the proceeds from the house to pay for her assisted living care. I don't know the exact details, but I think maybe my parents could also gift us some cash towards the down payment that would go right back to them/my grandmother, so that would be up to $60k total from the two of them to the two of us in addition to the equity gift from my grandmother. 

What would be the best way to make this whole deal work? $315k would be more than 30% under the fair market value. I've read that you can "usually" get away with pricing the property up to 25% under FMV without IRS coming in for gift taxes. This part I'm unclear about and haven't been able to find enough information on. Is there somewhere that explains that better and what the rules are? Is that the same for all types of mortgages and for non-arms length deals? Let's say that they can price at 25% off safely so that would be $345k. If my grandmother then gifts me $30k in equity (8.7% of the house price), i would then need only another $69k to reach the 20% downpayment mark. Maybe with a combination of that, plus some cash gifts from my parents plus my current savings, i could get away with not needing to refinance my house? Would that be the best way to go? Is the information i read wrong about 25%? Some things i read say gift tax rules will need to be used for anything under FMV.

Also, something else i don't really know anything about is seller financing. Would it be possible to do a mix of a conventional mortgage and then some seller financing? Maybe $150k conventional and $125k seller financing with my parents to get a better interest rate? Would that be possible with my parents if it's my grandmother that is the owner of the house? Would it need to be with my grandmother instead and then if so, what happens when she passes away? Is this a good idea at all or would it just be better to go the conventional route? I know my parents want at least a good lump sum fairly soon, so I'm guessing a big seller financing loan would not get them that.