The world is not static. Your plans are constantly modified by outside forces, interest rates, bank policies, GDP and jobs, government policy, your community and the individuals around you.
You can look at the fluid movement around you like many do; a complete shock when you get in that minor car accident, shelling out a couple thousand, never expecting it to come their way. We have the numbers, something like 50% of American's can't deal with a $1000 emergency, 75% can't deal with a $2000 emergency. However these movements around you, outside of your control are not meant to be just problems and money you shell out to stop bleeding; they're opportunities as well.
In this case your plan is a certain direction; pay off all debt, thus all your money has been going that way. However, things have changed. An opportunity has come up, right now! This, on your part, demands action or possibly inaction. The same could be said when I go thirft shopping or watch the online buy and sells. Some fantastic opportunities, many things I ignore. More often than not I walk out empty handed.
The question, I answer myself is by making a short list of things that will need replacing or wanting in the near future. When I go out, should I find such a thing, it could be worthwhile. Every so often there are things outside of that range, but I don't really need much in life, typically.
So if this has been on your mind for some time, look at it as an opportunity. The question now becomes, could another version come up quickly enough, or ever? How long are you willing to wait, what quality is this in? If it is that desirable, if you think you'll only find this one, that opportunity could be necessary. You very well could need to modify your plan. Take on some low cost debt to take up this opportunity (mortgage through the current owner, separate mortgage, tack on to your current house mortgage, for $40K, maybe even a line of credit with a low rate may suffice). Knowing you'd be diligent, this could be paid off quickly.
Before I'm heckled, let's math. You buy this for $40K now, or instead wait until the stars align. Paying interest on $40K over 2, 3 years, versus that waiting game, perhaps finding the next home for $50, 60K, even with cash in hand, the changes in potential appreciation, rental ability, or just the balance of the later costs to the interest payments now, may actually make it worth it.
This is a similar business tactic you'll see with many wealthy folks, they'll jump on a great opportunity for a low interest rate, pay it off in time, but make the worth in the moment of. Opportunity doesn't wait, that's for sure.
My final thought, have you considered talking to him into some form of mortgage, explaining your situation, your interest in the house? An open discussion may be well worth it; see what he's willing to look at doing with you. A slow payment for him to get out of state may be worthwhile.
