@David Bellmont - I am not sure about the process for subdividing the lot, or breaking the units into condos, so I won't comment there.
But as far as financing, it sounds like traditional financing it out the window. But you could look at private lending, hard money, or commercial financing. Then structure the deal so you get a first mortgage to cover the $170k and have the parents do a seller financed second mortgage. Now a lot of this will depend on the property value, your credit, your reserves and the lender. But, it seems doable.
Yes they could make the sister's unit a condition of the sale. You could have an option for the sister to lease at $1 a month/ year for how ever many years you want, it would be a separate agreement that you could write up privately or with a lawyer, but my understanding is that it could be done. Speak with a lawyer to be sure.
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