Seller finance or Lease Option?

[Rob McDonald]

I rent out a townhouse and the current tenant want to buy it. The property is worth about $185k and my current mortgage balance is around $150k @ 5.875%. Tenant has agreed to paying $210k at 6.5% with no down payment.

Obviously, he'll be upside down on LTV but they're ok with it because they can't get traditional financing and I don't want to sell for $185 (minus RE commissions).

Any red flags with buyer being immediately upside down?
Can I seller finance when I currently have a mortgage (Utah)?
Would a Lease Option be a better solution?

I'm obviously new to this site and appreciate your ideas. I'm only a landlord by "mistake" (rented out property because I didn't want to sell at deflated price when I moved out) so my experience is low.