However, their terms involve a 20-year amortization, a 5-year ARM, and a rate of prime + 0.5% thereafter.I’m exploring other options for financing and would appreciate any suggestions or advice.

It's a 7-Yr ARM, but I am comfortable taking the risk since I could just pay it off if the interest rates are really unfavorable, otherwise will refi into a fixed. 

Hi There-Some feedback would be great- Do you Sell the house yourself or do you engage another Realtor to do the sale and keep it at arms length in order to reduce any liability?

Do better rehabs.  100% agreed mate,Safety comes in the volume.Something that I've "preached" for many years.It's not worth the time, money or even risk buying 1 or 2 or even 3 properties unless an investor has a growth type mindset and a will to scale to 10+.It's very simple, you own 1 and it goes vacant.That's a 100% impact on your income.You own 10 and 1-2 to go vacant.That's only a 10-20% impact on your income.It's also a very high likelihood that problems will always exist with 1 or 2 properties at any given moment...Plus, such markets (Ohio and Michigan) don't appreciate as much as many others like a Texas and Florida for example.Michigan and Ohio are slow movers and only recently (10+ years later) caught up to some of the other "higher flying" markets from a yearly growth percentage.Much success

To me, safety is relative.

But you want to build a financial safety net for them.  2.  

This is often easier in lower tier markets where the appraisals are not indicative of how the property would sell in an arms length transaction.The other risk you run is over extension.

That means either you won't cash flow or your Return on Equity (ROE) will be terrible.Since this is your primary residence you'll be exempted from paying capital gains taxes when you sell.If you sell to your parents, it will be considered a non-arms length transaction and will get closer scrutiny.

I personally could give a rip about the buyers safety if they dont know any better and get wiped out so what.. but Sellers thats a whole different matter.. a sub 2 gone bad can destroy them financially emotionally physically break up marriages etc etc.

When you see what people do with old space heaters, guards and safety removed, plugging in several in one overloaded extension cors,... you can see where the concern is coming from.