These are professionals with additional training and a stricter code of ethics.

Also have a separate entity for construction / flips as you get different tax treatment.

@Russell Brazil, I do believe the South Carolina contract is similar in that a clear CL-100 inspection is expected at closing, even if there is an HOA, but if not the buyer only has the following 3 options:Accept the Property in its present condition, Negotiate with the Seller for the payment of these repairs and treatment, or Terminate this Contract by Delivering Notice of Termination to the SellerWe have been clear that we won't be replacing the sheathing as we are not authorized to remove the siding to do so, but they haven't given notice on any of the above options. 

I want to point with the property manager living on a reduced rent, maybe test them first - hire them and watch their work ethics and performance for at least six months.

A long-time resident at where I'm now living told me when a previous owner (that went bankrupt) started accepting HUD tenants, "that's when the drugs came in" (I wasn't living here then to be able to confirm this assertion, but I have no reason to doubt it).The same reaction happens in business ("street fighting" and "lifeboat ethics").

But I know there is a way viable & ethical way of handling this so I can get the financing.

Walk the ethical middle line and you will get tripped up over and over again trying to stumble to your first deal.

How is ethical for the HUD inspector and bank to do this?

These are professionals with additional training and a stricter code of ethics.

Now, for 1031's, whether you traded up, or down, for tax treatment, your replacement property becomes two for tax purposes.In cases where you traded up, and took on a larger mortgage, the tax treatment is easier to explain and calculate.