Stands to reason their motivation to sell with minimal hassle is high at that point in time.

The LL is in the wrong, but you have been minimally harmed (some lost time and effort, maybe application fees).   

If the borrower defaults then we own a property minimally valued at $1,700,000 while owing about $635,000, or equity of $1,100,000!

I did it for almost 5 years with minimal issues back in 2010's.

I'm matching the terms you have above... it may make sense to look at a 3 year Prepay instead because the adjustment is minimal usually.Lender 1: 7.25% With 2 Points Up Front or 7.99% if you want to do a 0 Point Loan.

@Chris Baist When you say minimal capital I'm not sure how much you are referring to.

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The jadu would most likely have minimal value or be discounted since of it's owner occupied requirement and therefore, not having the same rights as a traditional 6-unit property.As to the lending part - I am not sure how lenders are going to look at this, since it does now fall under the commercial definition.As to your specific question: It might increase the property value.

I am also interested in purchasing another property that is ready to go with minimal repairs needed to start getting some passive rental income.

I've also been considering this as an idea for generating cash flow with minimal capital outlay.