I don't think you are going to be able to get insurance for two separate living units in a single-family when they are both illegal and likely do not have the correct egress windows (basement) for fire safety which could subject you to huge liability if something happens to either party.

There are actually THREE kinds of subject to transactions1- subject to existing mortgage without lender approval2- subject to existing mortgage WITH lender approval3- subject to existing mortgage as part of a seller financed wrap around mortgage.with #1 and #3 it’s in everyone’s interest to utilize a third party servicer, who collects and then distributes payments.  

It's better to be honest with your current lender and all parties involved in the transaction, than to risk losing your EMD and falling out with lender Bs false promises.

I am also on the same boat and researching on an experiences on Ray.Does anybody have any experience with Ray? 

Quote from @Patrick Roberts: Echoing what Chris said - use a third party servicer.

Hey @Rich O'Brien, late to the party here but curious to see if you were able to find a way out of your tough situation.

Here are a couple of ways you could structure the deal:Lease Option with Seller Financing: You could lease the property with an option to buy later, allowing you to rehab it while giving the sellers time to find a 1031 replacement property.Seller Financing with Deferred Payment: Structure the seller financing with no immediate payments, allowing you to refinance once the property is appraised, and the sellers can complete the 1031 exchange when ready.Escrow Holdback: Transfer the deed into an escrow account, giving you control without immediate transfer, so the sellers can take their time with the 1031.Third-Party Facilitation: Use a qualified intermediary to hold funds and facilitate the 1031 exchange while you refinance.These options allow flexibility for both you and the sellers.

We only charge third-party fees like the appraisal and the borrower pays the vendor directly.

The back of the note is stamped "Pay to the Order of" to some third party "without recourse" like a check.

That would be a situation where you have a joint brokerage account with a family member(brotheror sister, etc) or for example you own a piece of real estate with another party.