Does he want to use the house?

Lowering your standards invites expensive evictions and repairs. 

For example, I live in Gilbert, AZ, which isn't exactly the cheapest place to live, so if I begin to look for a house here in AZ are the lenders going to want to see 300k-400k$ in liquid assets for me to get approval for a mortgage (as the homes in my area are around 800K-1M)? 

I have my primary property which is a single-family house that I house hack.

If you're willing and able, I do recommend the "house hacking" strategy which is just a fancy name for buying a rental property and living in one of the units, because you'll get very favorable financing - an owner-occupied fixed-rate 30-year mortgage.I'd also say, analyze that property as if you won't live there and it's a pure rental, and make sure the property is still cash flow positive if there's a tenant in your unit because then you'll know if it's actually a good investment.And when you analyze it, include payment of a property manager in your #s because if you don't, and doing so would make it go cash flow negative, then you've just bought yourself a job because you literally can't step away from managing it without losing money.

How much less will a potential buyer pay for the house, now that one "bedroom" does not have a closet?

The city has already approved the permits, and the cost to rebuild the 1200 sqft. house is estimated at around $120K.

I am well versed in pretty much every facet of Real Estate: house hack, LTR/MTR/STR, multifamily, and fix and flips primarily.Aside from that I am also (somewhat) a serial entrepreneur, having started and sold multiple business' over the last 15 years.I also meet with 20+ professionals every week, through referral groups, meetups, and just 1 on 1 sessions trying to get to know people and make connections.I would love to chat with you if you are looking to meet people and get more information about real estate in San Diego!

Chicago is losing housing stock at an alarming rate. 

Generally, a good property manager will make sure to do the following:- rollout a strong marketing plan - thorough application process - know the fair housing laws- have the vendor relationships to take care of any emergencies that could happen- dealing with late fees & evictions!