Occupancy fraud occurs when a borrower claims that the home will be owner-occupied to obtain favorable bank status when the property will actually remain vacant.  

There was a favorable inspection, appraisal contingency, and an agreeable closing date.

I assume it's a split heavily in favor of the person putting in the money, but then what motivates the other partner to do a good job?

(think this one over very carefully -- if you think ordering people around is "supervising" or "managing" a job, do everyone a favor -plan on swinging the hammer yourself).Do you have the time, money, patience and skills to either do the job yourself or deal with a contractor? 

I'm not in favor of investing in properties that have negative CF...that's not the same thing. 

Other reasons beyond the appreciation that you mentioned is because if you are getting a mortgage, interest will be more favorable to a primary home.

When can we expect the market to favor the buyers?

I know some of you will probably tell me to offer on both properties, but....which one would you favor?

One thing you'll want to remember is that the rules when you convert a rental into a primary and especially when you do a 1031 and then convert that from rental into primary after satisfying intent  are not as favorable as just buying a primary and living in it 2/5. 

Also look at states that have favorable landlord/tenant laws and reasonable property taxes.