Maybe propose to help them find  a rental and pay for a few months of rent in exchange and money to boot if there is significant equity.

In that case I would propose to only buy this house for no more than $120,000 still not at $174,000.

Which do you propose?

Things like ST3 and and the community hubs that the mayor is proposing.

If not, you could always state "To be discussed" and let prospective tenants propose the terms to gauge the market (however the obvious risk is that your friend gives way too generous concessions for the market based on a few initial offers by prospective tenants).Disclaimer: This is from my experience in the New York City metropolitan area and the market in your area could be significantly different.

What I am proposing is a win win win situation, (the bank gets paid, I get a house to live in, and the seller gets to walk away with acting as the second bank and will receive monthly payments to her.) so she doesn't leave with nothing.

It’s being proposed now.  

There is a bill proposed by Chris Ward district 78 called the California Housing Speculation Act that proposes charging a 25% additional tax (an income surtax) on the profit (above the regular tax collected on the profit) if a home is sold within 3 years of purchase. 

Do it again, take the funds, buy another rental.I would pay close attention to the proposed California new tax on property owned three years or less.

I frequently use Subject To when buying a property but I look for these characteristics before I propose it to a seller.The first thing I do is determine how motivated the seller is.