if there is appreciation, but you wouldn’t sell your current home tax free and buy a neighboring home to rent out, (There by raising your cost basis for additional depreciation and lower capital gains tax.) then it probably doesn’t make a good rental property. . 

Typically, the adjustments I see on appraisals for basements are more flat rate adjustments. 10k is usually the number I've seen.What stinks is that there are a couple of model types that have below grade space where the builder, I'm sure, was trying to lower the taxes by having it below grade so the county wouldn't count that space in the assessment.

Due to current interest rates, many CAP rates are much lower than they should be and usually there is only so much price discount a non-delinquent seller will be able or willing to offer.

Should I wait for Spring for greater inventory, or for lower rates to see if cashflow improves?

I think you'll be hard pressed to get an ARV of $140k IMO...I'd expect something around $115k or lower.

Not only will you not be able to renegotiate after getting the approval, but documentation of condition issues will help you to get a lower appraisal to begin with.Be prepared to move fast after the approval letter is issued.

From my understanding, it might be more advantageous to refinance as a rental property at a lower LTV with income from two units, rather than as owner-occupied at a higher LTV with only one rental income considered.

Taking these two pieces of info will tell you how long you will take to get an offer, so if you go past that you should lower the price, and then the other action item would be to starting off lower than all the other properties if the condition is better than your condition.

If you are willing to entertain areas outside Gainesville, you should look into areas like South Fulton, Forest Park ( lots of lower priced inventory) Jonesboro, and College Park to name a few.

Alternatively, your in-laws could partially gift the property by using the annual gift tax exclusion ($34K per couple annually), lowering the sale price and their taxable gain.