Checkbook control is convenient but the initial costs of this type of IRA with the providers I found is very prohibitive.

He is willing to sell us a 5% position in the company instead of a loan but buying shares in an S corp in prohibited.

Jon KlausYou should check out this recent article by Mat Sorenson at KKO about this very subject:Self-Directed IRA Prohibited Transaction Costs Taxpayers Over $250KIf you wanted to get fancy you could probably use a preferred equity scenario that would be very debt-like.

Some states have laws specifically prohibiting you from contacting the owner for a certain period of time.

The FTC doesn't prohibit franchisors from making financial representations only that there is a reasonable basis for the statement and that it include written substantiation.

Also the cost could be prohibitive.  

This is not something that can be done independently by a CPA.There may also be state registration fees or taxes for the LLC entity.IRA custodians do not establish the LLC entity as they are prohibited by rule from providing legal services (they are a reporting layer for the IRA).Find a reputable firm that can educate you on the process, implement the structure and provide you with guidance along the way as you invest.This is a great way to diversify your retirement savings into real estate.

Perhaps there is language in listing agreement that prohibits this or perhaps the seller just thinks she's prohibited from disclosing it. 

You may want to check the 1st mtg....it may prohibit a second mtg, which could cause the first to foreclose.  

How do I remedy this situation if I engaged in prohibited transactions?