Complicated sale and remodel of investment property

My stepfather and his wife have just moved to independent living and now want to sell their home to my spouse and I so that our sons can live there and pay reasonable rent in anotherwise costly area (metro DC.) Comparables in the area are $450-$550 move-in condition, however the house has been neglected for 25 years and essentially needs gutting. Our builder estimates $200k in renovations.

Originally my stepfather was going to hold our loan for a more favorable rate and flexibility on the down payment. However, our realtor suggested a 30 year $350k conventional loan with the idea that they would take $150k to invest then loan us the remaining $200, reducing the principal of the loan each year by $39k with gifts to each of us. There are two pressing issues with this arrangement. The first being that the house looks as though it might not appraise for the $350k. In addition, if they gift us a reduction in the loan and a medical catastrophe hits, Medicaid has a 5 year claw back period that could force us to give all of the money back in one lump sum or else deny them eligibility.

The next thought I had was to purchase the home directly from them for $100-$150 (depending on how much cash I can come up with) then pursue a construction loan on our own so that their future care isn't in jeopardy. Trying to balance what's best for them and us.

My mind is buzzing right now with the complexities of this transaction and the suggestion that we speak with a realtor, real estate atty, an estate atty, an accountant/CPA or some combination. I've already spoken to two real estate attorneys and they've given me different advice. Any thoughts on minimizing our liability/loan are greatly appreciated!

#medicaid #clawback #finaincing #investmentproperty #constructionloan #nonarmslength #familyloan #renovation