Here is my rule of thumb on lease options:
DO NOT stay in the middle of a lease option (sandwich lease option) UNLESS the seller is willing to sign the deed over to you.
DO NOT stay in the middle, even if the owner is willing to sign the deed over to you, unless:
A) There is at least 30% equity in the property
B) You are making $ 200 or more per month cash flow
C) Your tenant has put at least 10% or more down to offset the risk of going into foreclosure.
Assume that all lease options will be kicked up to foreclosure court. It depends on what the judges mood is that day! It is a very grey area, so you have to figure $ 2,000 to $ 4,000 attorney fees for the foreclosure, plus at least 6 months of mortgage payments unless you can do a cash for keys with the tenant.
Assign, assign, assign!
Even if the property is overpriced, a tenant / buyer may want to buy it!
If he wants $ 169,000 for the property and a tenant buyer is willing to pay $ 10,000 for an option and your seller only wants $ 500 for an option, charge your tenant a $ 9,500 assignment fee and get out of the middle.
That is exactly what I would do on this deal, since there is no equity and lots of response. See if you can make a quick assignment fee and move on down the road.