I have uncovered fraud in doing this work and have cooperated with authorities on more than one occasion.

So, I apologize if my comments are a repeat of someone else such as Jay Hinrichs.You are going about looking for a market to invest in by looking at the market which is not my way and which I find to be flawed.

so going with this strategy if you think the market slowed down was flawed from the start.Maybe your house is only worth 350K in a slower market, or maybe there will be other offers.  

Do you see any other potential caveats or flaws here?

A title search before bidding would have uncovered this.

But a good inspection and negotiating after the inspection can help uncover deferred maintenance expenses. 

Unfortunately, a lot of people become overly optimistic with zoning and permitting and especially their timelines, it is good that you were able to figure out the flaws in the strategy on your own.

Is there a fatal flaw in this premise?

The other alternative would be to somehow intervene in the foreclosure case and find a flaw in the banks work to date that would cause them to go back to the beginning.

We bought a house that had good bones, and that paid off in a big way as we uncovered no major renovation surprises.