In most states, they would need to disclose that you are well / sewer and not city systems. 

Being guided by rules of thumb can backfire.I've always considered being a landlord as buying a job, sometimes it's a great jo and sometimes not.If you never had the job before, you may miss some things like:A tenant has a guest over who trashes the place...Your tenant turns out to be a cook, a met cook.....Your units/house get red tagged, vacancy may be for months....Tenants die in there, little extra clean up and disclosing the death to new applicants might take longer to rent....Oh, city council just past another safety code for rentals, write a check....Your insurance is cancelled, you don't have a fire escape for the second floor....You find out you still need to evict a tenant who was just sent to prison....It's December 23, 8:00 pm, the furnace just broke down, call a motel....A greese fire just took out the kitchen ceiling.....Oh, the fire burned the electrical, the fire department just red tagged you....The next door neighbor's kid was bitten my your tenant's dog, do you still have the same agent....Notice of Legal Action, April 28th, are you off that day.....Tenant broke a faucet, the place is flooded from the top floor down....Another Order to Appear, a health code violation, the tenant's lawn mower is broken....How's that easy money going for ya?

If you deduct fees, you'll have to disclose that in writing to the tenant. 

The GL is just for all around liability and Error and Omission is if we are sued for missing something that the original seller disclosed to us and we didn't not communicate to our buyer. 

It's fully disclosed so they can't complain.

So I still haven't identified the properties for the 1031 exchange and feel a little wary about the whole process now.I'm just wondering if I should follow the agent's advice and take the reduction or wait and start over--but now that I have the termite report I will need to disclose that, of course, and I wonder if that will affect the price.   

Andy, I'm certainly not an expert, but from what I have been told Brie is correct, you'd be hard pressed to find a lender willing to do this, and you do have to disclose this type of seller financing to the bank even if you have the cash in your account already and are just going to put the seller financed money back in your account to replace the down payment.Having said that you might be better off getting a second lender like a private investor to cover the 20% however you couldn't use the property as collateral for a second lien unless the first lender is ok with it, or pull equity from another source if possible.Do you have any other properties to pull equity from, or is this a fix and flip that you could build equity into?

Once you know for a fact something is an issue you would be obligated to disclose it if you don't or aren't able to remediate it.

Many times there are hidden fees that nobody knows about and the public suffers when they are hit by such fees, often being unaware totally that they would have to pay some kind of contrived fee which was not disclosed openly up front before they signed up.  1.

Also, the property is being sold "as-is" so you are taking on a risk regarding liens not disclosed.