Another angle could be to sweeten the deal for the sellers by offering a little more than they are asking if they will give you more time to pay it off. Say offer $70k with a 5 year option. You might try it without even raising the sales price.
There seems to be two schools of thought on these deals. 1, get the money and get gone. 2, try to control it while it appreciates for a while and let someone else pay the mortgage down while the value is going up.
I wouldn’t give them cash until I had tried other things. It is hard to tell from your post just how motivated they are. They may NEED the equity in cash or they may want to be rid of the house in any way that will get if off their minds.
They may be workable with the 5 points that you could lose to the hard money lender going into their pockets and coming off the price. You might also just break the equity down into payments and don’t even mention interest. " I will pay your mortgage and give you $400 a month toward your $37k in equity". Tell them you are selling the place in whatever way it will move. It may wrap up in a month or it may take a lease option to do it.
How about this?
Give them their price at your terms. $4,000 going to the seller up front. $400 a month interest free, 3 year option. You sell on a 2 year option and have an extra year if they don’t close to sell it outright.
Equity of $37,000. After two years of paying down the mortgage you have taken the equity down to $23,400 to pay the seller. You have also paid down 2 years of the current mortgage. Hopefully you have cash from the first buyer’s option fee and some cash-flow. Now you have a place worth $110k or so depending on appreciation in you area.
Sell it outright (in an exchange) or go back to the seller and offer to pay them off and take the first older mortgage “subject to” if you pay them the rest of their equity. Your 2 year good payment record might help you here. If they agree, sell owner carry, top dollar, above market interest rate. You may have to kick in a little to help pay the equity off but you will have great residual income for a long time.
It is my understanding that if you record the option you start the clock on holding period for future 1031 exchanges. It may be best to hold this property long enough to protect some income. You have the added bonus of paying down the mortgage that sounds like it may be old enough to be taking out serious chunks of principal every month.
I would try to find out more. Dig deeper and find what their actual need is.