The 25% has to be your funds.Now, there are non conventional options that would be a bit more flexible but even most of those programs will require at least 20% down with no second mortgages filed on the property. 

The guy has already stated that he doesn't live there so that alone proves that he knows that was never the intended use (is their a police report or statement for your file?).

Typical cost for the setup would be in the $15,000 range which would include production of the Private Placement Memorandum, Subscription Agreement, and Operating Agreement, Investor Qualification Forms, as well as filing Form D with the SEC, and state “Blue Sky” filings in those states where your investors reside. 

If you are syndicating or partnering with other investors to fund a Sponsor's deal and you are a company doing this (LLC, partnership) then get a PPM attorney and file with the SEC. 506B is easiest but if it is really risky...then 506C is best. 

@Sean O'Keefe, Can I get a copy of the file? 

If over that amount, she must file a gift tax return, though no tax is owed unless her lifetime exemption is exceeded.

You could also try looking up money judgements filed against local businesses at the magistrate level and target them with direct mail or driving for dollars. 

I also heard horrible stories that if you don't file it right, it will take months to evict a tenant, etc.

You don't need file any paperwork with courts, etc?

In that case, you’d typically need to file a legal challenge, which could involve going to court and showing that the restriction is unnecessary or unreasonable.The best advice I can give would be to consult a real estate attorney to understand your specific situation and options.