If you aren't refinancing--(hence tying up their $130K for awhile), my opinion is they should probably get the majority of the cashflow since you have little skin in the game. 

Basically, "gutting a property" means different things to different people.My rehabs have often cost about $100-150psf, but my wife and I don't do low end rehabs, and most would call what we do higher end (unique tile options with bath wall tile and tile backsplashes, solid surface counters, nice cabinets).  

Most wholesalers try to get sellers under contract at the lowest price and with a couple of outs but with all other terms being completely favorable to the seller, including a provision that the sole remedy of the buyer in the case of seller default is a return of the earnest money deposit.That strategy is short-sighted and allows a seller to breach at his/her whim when a better offer surfaces while under contract.Like @Bill Brandt said, all terms are negotiable and every possible scenario should be addressed in the contract.

On the surface, that seems like a smoking deal because it comes out as an 8.9 Cap. 

Maybe consider running them by an experienced RE investor in the area who doesn't have any skin in the game. 

Beyond those questions - which will drive a lot of the answers you want - there are these basics:For a personal house - you can usually get loans with as little as 3% down... but for "income properties" - the banks usually want  you to have more 'skin in the game'.  

Remember, you're in this together as they has skin in the game too.

The fact that the damage is present on the surface means the damage and infestation is much worse then you think or will expect.

It obviously is absorbable through skin, but if you look at how that is done, they are using a transdermal patch that is in constant direct contact with skin. 

Going to the trouble of writing an offer shows that someone has more skin in the game than simply someone off the street (or so goes the logic).