Advice greatly appreciated on potential deal

[Jake Engle]

Thanks for taking the time to review this unique situation:

I am currently considering moving forward on the following deal as I feel like it is a slam dunk, but could really use some affirmation before making the leap. I will break down the deal as clear as possible, but realize there may still be some missing info.

Property: 12.5 acre farm on the outskirts of town. The farm consists of an 1860 farmhouse that is a duplex and has been updated with new windows and is in very good condition. Each side of the farmhouse has 2 bedrooms and market rent is 1200-1300 per unit. 

Aside from the farmhouse, there is a 3 bedroom mobile home on a basement foundation that is currently rented and market rent on that home is 1400-1500. Both the mobile home and the farmhouse are connected to a recently installed sand mound septic system. Public utilities are not available at this property. 

There are numerous outbuildings on the property with rental potential. A large bank barn (needs new roof, which I know can be pricey), a three car commercial grade garage, and two other garages. The three car garage is currently rented and the bank barn has a lot of potential to be rented as well.

The current total rent that the property is brining in per month is about $5,000 monthly, with the potential to get in the ballpark of $7,000. The yearly property taxes are $8,000. All of the electric and heat is the responsibility of the tenants. 

The next aspect of the deal is what I am most interested in. This property includes a lot of prime road frontage that has some great views and would be highly desired. Through my research of local zoning, I would be able to subdivide three 2 acre lots off of the total 12.5 acres. Once the subdivision was completed, the lots would be worth a total of $400,000 conservatively, with good possibility of $500,000. I am a real estate broker in the area, so very comfortable on values. After the lots were sold, I would be left with a 6 acre farm bringing in $7,000 per month and have gotten back $500,000 from the sale of the lots. The property would still have a value of $500,000 after the lots were split off. I realize I am leaving out subdivision costs and other factors, but you get the idea. 

With everything above in mind, I am trying to figure out what structure would make the most sense. I believe the owner is going to be open to carrying back a second mortgage if I want to go that route. If I went that route, I would likely pay the balloon payment after the first lot were to sell, which would cover the $120,000 second mortgage. 

Some questions I have:

-Should I be up front with the lender that I want to subdivide and sell lots off? How would that usually play with the lender?

-When I sold the lots, what would the best strategy be with the proceeds to avoid capital gains? 1031 exchange the sales of the lots into a multi family? Pay capital gains and pay off the 2nd mortgage? 

-After splitting lots off, should I sell the farm that has maximized the rents and been cleaned up? The value of the farm would still be $500-550,000 after splitting off the three lots. 

This property has been sitting on the market for a long time, mainly due to the owner being a 93 year old real estate broker that hasn't marketed the property well. I really feel there is a huge opportunity and the deal is a home run, but was hoping I could get some opinions whether this is as much of a slam dunk as I think that it is. 

Any and all input that you care to provide would be greatly appreciated. I apologize for this being rather lengthy and still leaving out other variables, but it is generally pretty accurate.