When I say quality, a quality person renting a sub quality place isn't happy, if they have a situation like a foreclosure through four years ago and they want to be homeowners again, they should be willing to jump through some hoops as far as rebuilding your credit historyAlso I mean quality is far as the quality of the location and the quality of the house that's for rent, many houses for rent are crap, and the best school districts and safest neighborhoods are only houses for saleCharles I've been doing this for 30 years and with the times that we are in right now with tenants having such a hard time getting a mortgage and getting out of the Rent  Trap, this is not a buy-and-hold strategy Like in stocksI live in a very expensive area Los Angeles and the average person can buy house because they're 900,000 to 1,200,000 where I live and lease purchase has a place here because many people can get mortgagesBut if you lived in Pittsburgh or you live in Cleveland or you lived in Orlando, you can make money with lease-option assignments or sandwich lease options if you've got a little bit of money for reserves as a real estate entrepreneur operatorWhat's in it for the seller is they can lease with an option hopefully with the right screening of tenant buyers that have ties to the community and strong employment where they're  not going to lose their jobsWhat's in it for the investors is that they can do a lease option assignment or sandwich and make some money without getting a bank loanI do like lease purchase over lease option for the seller because it's a stronger commitment and a definite end to the dealFor the buyer I'd much prefer a lease with an option with an extendable option in the initial contractFrom a business point of view if you're interested in getting better appreciation you can just do one year agreement and ratchet up new agreements at 5% a year or a new appraisal every 12 monthsI have put together a lease purchase arrangements where the sales price has been tied to either a new appraisal or a set floor price whichever is higher, to prevent a loss; in stocks this is called " collaring "where you have a  call order at a lower price to prevent a big loss and an order to sell a certain high priceSee protective collar http://www.investopedia.com/articles/optioninvestor/07/protective_collar.asp

If your talking about tear down and rebuild, that's likely impossible with mortgages.First you need to verify that the local zoning will allow multifamily on your lot.  

I am trying to determine how much a demo and a rebuild will be if I move forward with it and I think it may put this project in the red as both a brrrrr or a flip.

In Chicago, the market value is usually higher than the rebuild cost, so start off getting quotes based on your purchase price.A fully updated property will cost you less than a 100+ old frame building that has not been updated for many years.Lastly, for rentals, premiums I see for high end coverage is around $0.40-$0.50 per every $100 of building value.  

The first duplex was wood construction and apparently because the second duplex is block, the insurance company is saying the cost to rebuild is $175,000 (price of duplex is well under $100,000. 

Yeah that's what i was thinking but I'm rebuilding my credit so it probably wont be a year until I can do that. 

I see 3 options here:1) Fix and flip the current home2) Demo and rebuild a slightly bigger home (800-1000 ft)3) Rehab and add-on to the current homeHere's my question - assuming a $275 per square foot ARV, whats the best course of action?

We would be able to tear down and rebuild if needed. 

There's a reason why there's a market for "off-market" and a market for "turnkey providers".Why do builders that rebuild houses from scratch want to have their houses sold for much cheaper?

The differences in Building costs can vary so much, you may eventually want to get a commcercial contractor to estimate what they would charge to rebuild the structure as a backup.