Heck, you should mortgage your home to the hilt, and borrow every single dollar you can at 6-7% and crush it on the arbitrage.

The lender clearly didn't communicate with you or set proper expectations, which is why it seems the expectations you have are inaccurate.Most lenders will NOT allow you to order your own appraisal/BPO. 

It's not RTR's fault the property can't absorb proper cap ex, that's a product of the market.

im in Orange County CA and there is a huge market here for room by room rentals here. i've been doing this for quite some time (over a decade now), and it certainly has its pro's and cons. my advice if you go about this is make sure you do proper vetting before moving someone in... not only for financials/ credit-worthiness, but also for temperament and expectations in a co-living space. we ask a lot of questions like "how do you handle conflict?"

Make sure that you're properly vetting your team members especially your agent that you work with - your investor agent should be looking out for your best interest and should be able to explain why something is a good/bad deal.

If I understand correctly; the seller would receive 80% ($40,000) directly from the mortgagee at closing and would enter into a personal agreement with me for the 20% down payment ($10,000) in which he would be reimbursed separately from my mortgage payments at a separately agreed upon rate and term?

You can review your HOA's governing documents, also known as the CC&Rs, to understand the proper procedures.

Try to anticipate other potential avoidable situations with a follow up inspection to assess the Locksmith’s work and ask your tenant(s) if you can also use the time to assess for other issues such as unchanged HVAC filters, leaky pipes, working shutoff valves, working smoke detector batteries, properly working downspouts, clogged dryer vents, evidence of water damage from leaking roof, etc,etc,etc.

Have to look at these things properly.

My endgame is to end up with $300k/yr in post-mortgage income in 20 years based on investments I make now followed by continued investments over the next 10-15 years own.