It is lakefront so that is an important reason.

It’s only time before commerce and gentrification follows…There are lots of 2/3 flats in the area with reasonable pricing etc… 

Seems reasonable to me.

I can think of a couple of seemingly great reasons to stay in the deal, which would be 1) they'd get a portion of the rent we'd be paying to live there (again, I assume this would be split 2:1:1), and 2) if we live in the house for a couple of years, couldn't we sell it tax-free, since we would be owner-occupants?

Just don't combine old and class D unless you have a very good reason. 

I am hoping to find a reasonably priced photographer to take some sharp  photos of a Property. 

but, what i do know is that that easy OOS cash flow isn't so easy right now, for several reasons. 

Given the size of the asset, these won't be huge, but something to consider.REWARD - In addition to the benefits stated above, the only other reason I could see doing one on an asset this size is if you wanted to offset a property sale that would have a large capital gains. 

The reason being if you show them those reserves and the deal goes bad, they are gonna come after you for that $ and that will put you in a really bad position.

It's a dishonest promise.If you are in foreclosure, it sounds like you are either there or headed that way,  what you are encountering is a "foreclosure scheme" they are illegal in most places and for good reason.