As far as what to tell them, you simply say that you're listing it for $1,700/month and are not willing to lower the rate.

Suggesting to them buying their house for a wholesale range offer or lower dependent on the extent of the rehab, then having a contract in place that gives them a percentage of the profit to help get them back on their feet, paying off debts etc.

My guess solely looking at your numbers is that it's an older/distressed property which means you have to account for more costs in capex. 2nd thought being it's not in the best of neighborhood then you'd have to take into consideration lower quality tenants/ neighbors and maybe increase expected vacancy and late payments.

This lowered my cost basis per lot by 7k.

In my experience tenants on the lower end of rent tend to cause more damage than higher price tenants.

Since I have a fixed-rate mortgage, I understand this wouldn’t lower my monthly payment but would shorten the loan term by reducing the principal faster.

(I know, nothing is certain but just hypothetically) and all cash out loans are not created equal. if you have a lot of equity you can borrow up to 60% with the lowest rate possible, which would be close to a half point lower then borrowing up to 75% loan to value. 

You would arguably be better off buying a CD at a slightly lower yield with almost no risk, time, or stress requirements. 

If renters find out your utility costs are high, they will expect a lower rent to balance it out.

Taking these two pieces of info will tell you how long you will take to get an offer, so if you go past that you should lower the price, and then the other action item would be to starting off lower than all the other properties if the condition is better than your condition.