The house you have described sounds like our dream house
I am in an area where house prices haven't dropped at all over the years (maybe other suburbs have in the area but not ours), we've had a couple of houses be sold twice since the GFC in a few streets in our estate and each time they have gone for more then before with no improvement.
I do know someone who did what you are thinking of doing, however her parents had to pay capital gains on the whole price including the "deposit" they had paid - I would ensure that if you go down that path that the other party ensure the agreement is wordered correctly so that that does not happen as I could see that being an issue for friendship down the track.
I would be looking at the price of the house now, and how much you think you will be spending on renos over the 7 years. Will this house need anything done in 7 years time or will you be able to sell it in 7 years and be able to afford the smaller house with a granny flat?