Well it took you several months for you to uncover the issue....how was it then supposed to be discovered in a couple hour time frame from the inspector?

With supply being in the red across the Austin-Round Rock MSA, supply in peripheral cities is being uncovered and made available to purchase. 

Maybe not as much of a flaw as it is a concern.

You'll need to consider setbacks, covered vs uncovered ground (how much asphalt / concrete / building can exist), zoning (does the area allow multi-family or do you need a variance) population density requirements, building height requirements, and any other fun things that the town regulates. 

That may uncover any recent claims. 

Here is my plan, let me know if my logic is flawed or if I am missing an important component:- Make an offer of 70% of ARV minus construction costs. - Convince the seller to agree to a 6 months owner carry (lenders require a 6 months "seasoning" before I can refi) - perform rehab, get tenants in place and get the place cash flowing- After 6 months refi. bank orders the appraisal.- I would provide income data and before-after pictures to convince the appraiser of the forced appreciation. - With the increased value I use the %30 equity as the "down payment" and wrap fees into the loan. - Pay Seller financing note off- If there is enough meat in the deal I would pull equity out to finance the next rehab.- Rinse and repeat for the next deal. 

There are deals in every market, the key is to figure out how to uncover those. 

I’d negotiate hard for the right price on this one, and be ready to walk if the seller is unreasonable as there are likely some additional issues hiding in the walls that you haven’t uncovered yet.

What are the biggest flaws in this strategy?

They understand construction and will often find flaws where a sub is cutting corners before it is too late.