Help Figuring Out The Finances To Buy A House From My Mil

She has two options to build on her lot and sell the house. She wants to sell it to us but I’m not sure how to structure it that’s fair. It’s option 2 I need to know how to structure. Option 1 is straight forward. She currently owns the lot outright and also a house with $500k left on the mortgage that she lives in right now. Options below with made up numbers.

Option 1. Build a house, sell it to the highest offer, split the difference with her builder. We have no part in this option. Example: if she builds and sells the house for $2M, she gets $1M and the builder gets $1M. She then lives in her current home with the $500k mortgage. Done.

Option 2: We sell our house and use the proceeds to pay to build the house on her land and pay my MIL as well. This is where is gets complicated. She wants us to build a garage apartment (aka MIL suite) so she can live there. So given she would have made $1M from the sale of the house in option 1 we want to compensate her properly. If she lives over our garage she can also rent out her current house which is a huge benefit to her. So assuming she would live over our garage how much do we pay her? Option 2A is to pay her X dollars and she lives over the garage indefinitely. Option 2B is to pay her Y dollars and after 5 (could be more or less than 5) years she has to move back to her original house now that she rented it out for five years. I can’t figure out what is fair to pay her in option 2A or 2B. Any help appreciated.