So the 14.75% (15%) is just their cut.

Why I am leery of these "creative" things for people with little to no money One of the concerns of going to fast is over extending beyond their resources. 

The agent will have access to the biggest platform to get the property sold though, the MLS, so forgoing even a cut rate agent will create more of a loss than the agent fees themselves. 

My concern is whether the city could deny permits for these modifications, such as removing walls or converting a garage, or if they are mainly just concerned with safety and habitability.

I appreciate and welcome any thoughts, concerns, or ideas!

A 1,000 sq ft cabin when you have 300k into the lot just won't cut it. 

Anyway you cut it they will all want a washer/dryer. 

The concern is possible lead based paint.

My concern with the home equity loan strategy is I'd still have the first home mortgage, the equity loan, and a new mortgage (albeit reduced from the down payment).

A concern, however, if we do a sale, is with the price, as I understand that if I sell at too low a price (say, $200K, give or take a few thousand to pay off my current mortgage), the IRS could assess a tax on my parents if the price is more than 25% below market value.