Two issues with your analysis... he wants to fund $150k (no down payment) to get his cash back out... so his mortgage will be higher ($760)...Also, you don't have a CAPEX budget in your numbers.I think you'll find those two modifications destroy the cash flow pretty quickly.

The current owner made modifications to divert water away from the house.

The borrower then reached out to me for a loan modification. 

Some open end security instruments are designed to explicitly be an open end loan so modification to those security instruments would need to take place in order to match terms up with a closed end note.  

FEESApplication Fee (to cover administrative costs)... common in most markets.Move-In Fee (to cover administrative costs)... common in some markets, but not seen in others.Pet Fee (for the privilege of keeping a pet)Guest Fee (a per diem fee for the privilege of allowing a guest to stay past the customary guest period)Notice Service Fee (cost of serving/posting/mailing legal notices related to rental agreement violations)NonSufficient Funds Fee (cost of trying to process an NSF check)Rent Late Fee (violation fee)Utilities Late Fee (violation fee)Unauthorized Pet Fee (violation fee)Unauthorized Occupant Fee (violation fee)Unauthorized Parking Fee (violation fee)Unauthorized Modification Fee (violation fee) - modifying the structure of the property without written consent, includes changing out light fixtures and plumbing fixtures.Unauthorized Installation Fee (violation fee) - includes installation of  telecommunications equipment on the property without written consent.Smoking Fee (violation fee)Smoke/CO Alarm Tampering Fee (violation fee)Fire Suppression Equipment Tampering Fee (violation fee)Door Lock/Window Lock Tampering Fee (violation fee)Garbage Fee (violation fee for cleaning up and disposing of excess garbage)HERE ARE SOME OTHER IDEAS:Property Damage - charge as it occurs or as it is discovered.Special Services - charge as they are provided.

Anyone doing seller financing should do their due diligence at the state level.In that light, I'm correct and others mentioning specific state interpretations will add to the conversation to their specific requirements, but doesn't mean the federal side is totally discounted.TILA was incorporated into the DF Act, I read the original draft as to modifications, I skimmed it and it appears to me that  (seller financing was originally exempt from TILA), in those covered transactions that TILA will now apply.

So we have opted to use a commercial lease with modifications.  

Are they easy to negotiate/propose modifications and/or improvements to properties? 

Although even with those modifications to the deal, you end up with very little net(3K).I agree with the others who suggest you might re-consider selling.  

They were or are doing a lot of homeowner modifications.