We are also planning to have the seller pay closing costs, so I was assuming $1000 for any loose ends. 

It's possible that your agent wasn't aware of some of the charges that would be in the closing costs like the upfront mortgage insurance premium.There might be some excess things in the estimate.

If the regular market will not cover it, have your agent check in the Excess/Surplus lines. 

My insurance was way excess of what the house was worth.

So far, I have not had any problems with excessive water use.  

One looses $458 per month, which might go down to $383 per month if rent can increase to what property manager says is possible now.

The knob/handle is now loose and all the screws are missing from the inside knob.

If the loss is in excess of your income - you may be eligible to carry the loss forward.

Realizing this RE will have huge negative cash flow, how confident are you of market appreciation (property and rent) in excess of the negative cash flow as no one invests with a plan that shows them losing money on the investment.Final thing to consider is your likelihood of coming back to San Diego and how nice a home is it for you and your family. 

If the house does sell for more than the lender's opening bid then any excess goes to the former owner, after all fees.