If using a lender this is a non issue.

Through the price point you are targeting might be an issue.

You will NOT save any money by operating with an LLC, indeed there are startup & operating costs involved (not large), which means having an LLC will actually cost you more than not having one (outside of any liability related issues).

If the HOA is defunct, not operating properly, is underfunded, or has any other issues, it can prevent financing challenges for future owners (read this affects your exit), and effects the quality of the overall property.

I have set it up where I will be responsible for the title policy as it is my understanding that this creates the need for only one title policy in a double close and not two (of course need to confirm with title co) during a process like this.My questions are this: -What to watch out for when doing this, are there are any legal issues with marketing a short sale like this?

In addition to taxes, you should be very certain about value, and any other title issues.

We had a similar issue where the tenant had friends over, an altercation broke out and the friend was shot and killed.

Here’s what I mean, instead of talking with different lenders try to fix the DTI issues first.

Lending on an owner-occupied project requires licensing and opens the lender up to a bunch of other regulatory issues. 

Some basements in this area have water issues and if you plan to add bedrooms you will need egress windows.