Also, As I have said before in these forums, it really comes down to your risk tolerance and what you are trying to accomplish with your REI.  

In order to mitigate risk, I asked that they provide 3 months of security deposit funds under the pretence that if they pay on time for 12 months I would refund all but 1 month or just apply the other 2 to their rent due. 

How do I balance these two scenarios so I'm getting what I'm worth, but also creating value for my investor taking a risk on a first-time flipper?

There is a price that the investor is willing to pay for it depending on their risk profile. 

@Chris Martin  excellent post.. the reality this is as I stated NO warrenties and ALL risk on the buyer type of way to acquire assets. 

I am sure the seller figured if you could come up with $400K and with the property to secure the loan, that the risk was low.

I still have to occasionally remind my wife that it is all good debt.But never lose site of the fact that investing is still very high risk. 

I have a couple of suggestions:1. if you are doing a rehab that will include the wiring, you may get a Renovation Builders Risk policy to cover you.  2.

And james, I don't know that there will ever be a way to avoid the (due on sale) risk being there.Good to know that your finances can cope if and when the banks start calling in those ones.Also, "deeding the property to a land trust where the buyer would be the beneficiary" comes with its own risks, if you're paying the Seller directly rather than the actual Lien Holder/s!

Investors get enamored with the high cap rates (which is just another way of stating the risk the market assigns to a property, not it's true potential).