He's actually working his way towards getting to Seattle for work as an Industrial Designer.

You maybe trying to avoid title insurance, but it is designed to protect the buyer, not you.

Add that to a brand new designer kitchen instead of the cheap dated one I bought it with, and 10% is entirely plausible! 

This is one of the reasons that many investors consider getting their Realtor designation -- they get to keep the buyer's agent portion of the commission (or reduce the purchase price by a similar amount).

FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance.Any person individually or jointly owning a home covered by an FHA- insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations as described in HUD 4155.1 4.B.2.d.”Then note the only the exceptions where you may be allowed to have a second FHA loan at one time.

Purchase price: $499,950 Cash invested: $195,000 Sale price: $1,692,500 Purchase existing home, build new SFR, pack full of design and custom quality finishes.

Would it be best to design a custom template or has anyone been able to find a good one for this?

Because 10 years of ZIRP (zero percent interest rate policy) and a government fabricated loan, is specifically designed to make lending loose, putting people in homes they can't afford without government intervention...precisely what caused the first housing bubble.  2. 

If it would "violate" the exchange rules, who and how would the "governing body" know or inflict penalties?

The Commissioner of Highways may enter into agreements with any local governing body authorizing local law-enforcement agencies or other local governmental entities to act as agents of the Commissioner for the purpose of (i) enforcing the provisions of this section and (ii) collecting the penalties and costs provided for in this section.