This is not a great return, but not terrible.As others noted, there are other risks, like having the property insured at full replacement or purchase price, or if the option is 100% seller financing with no money down or very little, versus 20% traditional down payment, this can start to move it into a better investment.

They will be able to update you on what you need to do to help fire proof your home, and if there are any other options to lower insurance like external fire sprinklers, sealing up, attic vents, defensible space, etc.

We have three potential options.The first option is for me to completely owner-finance his purchase.

Has anybody found a workaround for this or would the seller simply have to hold the note long-term without the option of selling it?

If I have several options, I would prefer a HELOC with no initial draw requirements (i.e. to establish a literal line of credit that I have no specific short term plans to use), i.e. not something like the better.com HELOC. 

In the end, it may be the same amount of money or more, but it will just have to be structured differently as you navigate the shifting market.Northwest Valley would be a good option. 

I think the first step would be to contact a lender and figure out our best options moving forward.

I have been able to find a couple of options for this setup though, they just require separate leases for each room and sometimes 2-3 months of rental receipts as well. 

Kelly, you have many options.

I faced numerous hurdles and stressful moments, but I persevered and built a successful approach.To tackle this challenge, I recommend starting early by building relationships and seeking investors.