Local investors and active investors building in deficiencies elsewhere can make these work, but in cases of a true Turnkey property, I think these are bad investments.As for buying a property before renovation or even during renovation is a very bad decision.  

If both of the loans were originated to purchase the property there is no deficiency judgment issue.Otherwise, the 401K is safe harbored by law.

Any deficiency could/would be pursued against the defaulting borrower.    

Just the fact that your post mentioned the PM for this might not have insurance should be a matter of concern - because they did not take measures to protect themselves in that way; where else might they be deficient?

All the major MEP was marked deficient in the inspection report.

Reason I say that is if the bank forecloses, it will sell for less than a short sale - depending on the state they could seek a deficiency which the lender will pull his credit and see whats going on and find out more about this person.

In most states, the public auction clears out any junior liens, but there are exceptions such as tax liens, which typically will continue to be in effect after the auction"They are transferring title via SPECIAL WARRANTY DEED, rather than TRUSTEE DEED,so there's this:Special warranty deed Arizona and junior liensArizona Revised Statutes33-402, Forms for conveyances; quit claim; conveyance; warranty; mortgage .... 33-723, Right of junior lien holder upon foreclosure action by senior lien holder ... 33-730, Limitation on deficiency judgment on mortgage or deed of trust as .... 33-1226, Easement to facilitate exercise of special declarant rights ...www.azleg.state.az.us/arizonarevisedstatutes.asp?

We always try to point out any deficiencies in the home or neighborhood that would have an impact on the price, as well as supplying them with comps to support our price.

And deposit refund should always be sent payable to Tenant A and Tenant B unless prior agreement is made in writingAny deficiency whether it is damages or unpaid rent after lease termination is 100% the responsibility of Tenant A and Tenant B and not 50/50Not modification to the agreement can be made with the agreement of all parties.

What this means is if there is a default by the SDIRA on the loan, the lender has No Recourse to collect any deficiency that may be left once the lender forecloses and sells the property.