It speaks to "nothing special here", that's what it conveys. 

I could be misunderstanding how this deal was structured, but wouldn't the seller who is on the underlying mortgage have an incentive not to let it go into foreclosure since their credit is at stake?

Building a relationship with local real estate attorneys or agents specializing in STRs in the area can save you headaches down the line. 

Also, townhomes are a great bridge property, it's a common trend that those in townhomes are aspiring for home ownership meaning credit sensitive and with that right mindset. 

If you are running a LLC for your rentals is essential that you keep all business  funds in a separate account I like Credit  unions the best .

At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.I have 33 units, no debt except for mortgages, and excellent income.

I would look at it in terms of whether you can afford a worst case scenario where you're covering the deductible and have a credit line or cash to front the re-build cost and getting reimbursed from insurance afterwards.

So I get this referral from a relative about a tenant who has good credit score, no criminal history, and a good paying job.

In our trade, I would not expect any owner or GC to get this correct since our industry is extremely specialized.

Any special type of flooring that you recommend to make it look better and less maintenance over the time especially when there is turn around of tenants.