New owner financed deal prospect

[Evan Kline]

After some recent "driving for dollars" (actually walking) in my neighborhood I ran across a "for sale by owner" sign. As inquiring minds do I contacted the owner, got some info on the house, and of course asked if they would be interested in owner financing. It turns out the owner just retired and is liquidating so she can be free to travel and not worry about property management. Owner financing is her ideal scenario, as she likes the check in the mail every month. She is willing to owner finance at 3%/30 year with 5% down. I have yet to confirm, but I don't think she wants a balloon payment either, she's willing to ride it out til the end. 

Now, that seems like a great deal to me, at least from a financing standpoint. I'd be hard pressed to get better terms, even with an FHA first time homebuyer.

The house itself is a 5 bedroom, 3 bath, 1800 sqft. Similar homes sold recently (this year) in the neighborhood sold for ~200k (a few 4 bed, 2 bath homes around 1800 sqft). If you go a couple streets over (literally, just 2 streets) similar homes are being sold 250k-300k. She's asking 180k, just reduced the price from 190k (therefore down-payment of 9k). The thing that's making it less attractive to the average buyer is a portion has been converted to an in-law apartment. So the current house is actually a separately metered split 2 (or 3) bed, 2 bath; and  1 bed 1 bath. A couple rooms were lost to give the apartment more livable area. 

The kitchen is straight out of the 70's, and there are some nicely dated frilly curtains on all the windows, but based on visual inspection the house itself seems in great shape (Pending professional inspection). 

The rent is the bit that makes me question getting into the deal. Historically the main house has rented for $875 and the apartment for $460. The apartment is currently rented by a woman who has lived there for 12 years and rent hasn't been raised in, you guessed it, 12 years. Based on nearby rentals I can comfortably get the main up to $950/month. If I did some rehab I could potentially get it up to $1200/month. The apartment situation I'm less familiar with, but certainly can get it over $500, maybe as high as $600. 

Even pushing the rents to their highest limits I'm struggling to get close even to a "1% rule", which makes it a less than desirable purchase. On the other hand, the home will be well leveraged and I'll be getting 20% cash on cash return (after accounting for vacancy, repairs, taxes, etc) even if I don't raise the rents which makes that piece an attractive deal. If I add some sweat equity and renovate a bit I can get as high as 40-50% COC.

The other factor is I can stand in my back yard, throw a rock, and hit the house. That is attractive as managing the home won't require any driving. 

I haven't begun negotiation yet- Any thoughts, wisdom, advice, good dinner ideas, before I sit down with her and hash things out (I need to go grocery shopping tonight after I set up a negotiation time)?