Discussion with my PM and insurance broker revealed that they are both aware of other instances similar to this one. 

Why should the seller reveal their financials to someone that may have zero ability to close on the property?

Peeled two layers of wall paper which revealed some drywall, some peeling latex paint, and possible some lead or other thick brittle paint.

If the old tenants leave you can start fresh and raise the rents.

Don't think about the money you spent on a home inspection as throwing it away if you do not buy the property due to its condition or revealed findings from a home inspection.

I want to take a fresh perspective on it.

Obviously your parents may just want a fresh start with some money in their pockets but if you choose to pursue the property please share the journey on here as I will likely be doing something similar in the years to come. 

Everything else is pretty fresh.

When it has been rehabbed, I would move to the other unit renting the freshly rehabbed unit at top of market rent (if it has a good rehab, it should be able to achieve top of market rent). 

But in the meantime you can see the new paint and what the house looks like right in the middle of a BRRR rehab.Family room with fresh paint.Staircase with new paint.Front door and front porch view from family room.