If there is something you do not understand then as a signer you are supposed to seek clarity on it until you are satisfied and ready to sign.This doesn't mean people are not committing gross negligence and fraud against you with a deceptive contract.

The 1% in year 3 is negligible to most... 

If you plan on building your income or retirement around real estate, if you buy insurance for protection, your are being grossly negligent if you don't educate yourself or talk with an attorney as part of your planning.I doubt this guys products are as good as he claims, but I have no idea.

The Landlord's policy should respond to claims, and if there is some negligence on part of the PM, that is then handled directly between the Landlord and PM.

My home inspector said the same; obviously fan charges etc would be there for me to incur for long term but my inspector said that will be negligible (any idea how much/yr ?).

S corps and LLC's (which an LLC can also have S corp tax election)  are "pass through" entities where the business does not pay taxes, the income is passed onto you and your personal return.The liability protection comes from the entity holding title to the property so that any law suits would go against the entity and not you personally (except for cases of negligence by the owner of the entity where the corporate veil could be pierced - there are other means this can happen too).If you are looking to do this as a business and not a hobby, I recommend the entity route and make sure you have more than adequate insurance as your first layer of protection.

I don't feel comfortable with her negligence maybe because I'm less important client of hers, and basically I'm now struggling to get recommendations.

My question is, do you think the management company was negligent for not checking on the property or notifying us of the situation? 

As an out of state investor, you WILL get ripped off in the Memphis market paying 30-50% more on every transaction and where the management company counts on emergencies due to their negligence in monitoring tenants, properties, repairs, etc. 

Other potential lawsuits an arbitrager could face are practically endless but the most common ones would be the owner claiming your negligence caused  property damage, a renter alleging wrongful discrimination, or someone bit by a dog or bedbugs or sick from mold, slip and falls, fair housing laws violations, etc. etc. you get the idea…).