Rehab is likely 6 figures (open the layout, rehab pool, rehab kitchen, rehab bathrooms (3) converting one bathroom from 0.5 to 0.75), new and relocated HVAC, Digital locks, patio with deck accessible from Master BR, convert office to BR, convert large BR into 2 BR).  

Its not very enticing to buy something that you didnt get input on design and layout to have to sit through 12-24 months of city review.  

Homes are selling on my street from $460-$525k that are the same size/layout.

It sounds like you have a perfect lot layout for an ADU which will make it even more desirable.I don't know about the legality of allowing tenants to bid on the apartment, but it's definitely not the norm. 

Would the layout of the house allow for the addition of a third restroom?

I think many renters are not as concerned about room size as you would be when purchasing a home, but layout, remodel date and location will play a bigger factor in the cost of rent.

I am trying to let the owner lay out the terms he wanted before I say anything.

Fully understanding the zoning/lot requirements & performing a site layout.

Also staging the property helps if it is not a straightforward layout.  

Challenges was there were various walls that had to be knocked down to achieve the layout of a five bed-five bath home.