His "owner occupied" loan application is ok if he intended to live there when he applied.

The auction price seems to assume that the proceeds will be applied to repay the first mortgage and the second mortgage.

In all markets in fact, this applies. 

I would apply the cash flow to pay down the debt and hope to have significant passive income (or equity to put into something else) in 10 years.

But if they don’t even bother to fill out the forms to apply, or get a basic job to make ends meet, or borrow money from family or friends/ somebody else besides you, then they can’t stay.

Here's some basic copy & paste info that may help you make better investing decisions:----------------------------------------------------------------------------------------------------------------Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.Property Class will typically dictate the Class of tenant you get, which greatly IMPACTS rental income stability and property maintenance/damage by tenants.If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.If you buy/renovate a property in Class D area to Class A standards, what quality of tenant will you get?

Your GC will know how to apply for the correct permits.Avoiding the issues in the future is a function of respecting the permitting process in the first place.  

Mortgage recasting, also known as re-amortization, is a process that allows homeowners to lower their monthly mortgage payments by applying a lump sum toward their principal balance.

I am not an expert on your market but I will give you some advice that should apply well tov most any market:1.

------------------------------------------------------------------------------------------------------Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.Property Class will typically dictate the Class of tenant you get, which greatly IMPACTS rental income stability and property maintenance/damage by tenants.If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.If you buy/renovate a property in Class D area to Class A standards, what quality of tenant will you get?