Buyer can't get a loan, and carrying strands the cash for my next flip

Everything in that house is new, which is the one thing in your favor. No roof surprise for him in year two, no furnace call. That's a different collateral risk than the 1970s house nobody touched.

@solder new also means the buyer has no cushion of deferred work to defer. He's at 1,962 plus taxes and insurance on self employed income with 0 dollars left after closing costs, because 26k is his down payment and there's more than 26k of cash needed to close on his side. Ask what he has after funding. If the answer is under three payments, the structure doesn't matter.

Option 3 deserves more respect than you gave it. 249k is a 44k gain on 205k, it's cash, and you keep your spring acquisition. Carrying at 265 and then selling the note at 86 leaves you around the same money with a five year tail of somebody else's payment behavior attached to it. You're doing more work for the same number and calling it a better deal because the headline price is higher.

@thicket that skips the interest though. Even if he sells the note at a discount in month 13, he collected roughly 22k of interest first. That's real.

On the balloon, 60 months against a self employed borrower who's been denied twice is a bet on him getting bankable inside five years. If it's the exit you care about, keep the term where it is and use a partial instead of a whole note sale, because you can size the partial to the 55k you actually need in spring rather than selling the whole thing. Also budget for the servicer setup and the attorney drafting the note and security instrument, and confirm with counsel in that state what disclosures apply when the seller is a business that renovated and resold the house, because rules around who can originate owner financed loans and how often turn on that and it's not a forum answer.

Your options are three prices for the same house and you're comparing them at different points in time, which is why none of them feel right.

Option 3 is 44k in hand in maybe 60 days, if the conventional buyer shows up.

Option 2 is 26.5k at closing, roughly 12 payments of interest, then about 205 to 210 on a 234k balance twelve months out, so call it 60k spread over 14 months with default risk in the middle.

Option 1 is the same 26.5k, the interest, and a partial sized to 55k in the fall, and you keep the tail. Best total number, worst timing, and it only pays if he performs for 12 straight months through a servicer that can prove it.

So the decision isn't really which structure, it's whether you'd rather have 44k in March or a good chance at 75k spread across two years. Bring the down payment up before you answer that. 15% instead of 10% changes your LTV, changes what any note buyer quotes, and tells you something about him. If 26k is truly everything he has, that's the fact your whole plan is standing on.