It is in good condition, but has a lot of deferred maintenance. 

Yup, property condition, vintage, neighborhood, tenant base, property management are all very important considerations. 

There is also a provision in the promissory note that states in the event of default, we must deliver the property back in the same or better condition from the time of purchase. 2: We will deed the property back to the seller & execute a contract for deed.

Now we're seeing investors pouring money into buying Class C rentals - but, many are getting burned.In our experience & opinion, the main determinant of property Class is not location or even property condition, those are #2 and #3.

Many judges would feel you got paid even if no cash was sent to you.I could see this potentially working on a higher-end property that it in excellent condition with a Grade A tenant.  

So I've decided that due to poor caulking and grout condition of the upstair bathroom, I will cover the water damage, although the tenant did eventually cause more water damage.

Look at recently sold properties in the same neighborhood that match the size, condition, and style your property will have post-rehab.

Daniel,If its something you really like from all accounts, get with an inspector and property manager to give their thoughts on the area, condition of the property etc...

That applies to replacement cost only and only if more $ is needed to restore the home to a pre-loss condition than what is available under coverage A.

Because buying a house in excellent condition and then totally changing the layout can be expensive, especially if it's involving load supporting walls.