@JR Gonzalez, You can allocate the proceeds from your sale anyway you want. 

Usually in the year following your purchase, the property appraiser will reevaluate the house based on the new sales price.  

Would a low enough sales price make all of my concerns go away?

You just have to be careful because some sales agents will just advise you to over improve the property because it makes their job easier.

The property is a single family home that is on sale for $179,000. 

Also, not very easy to use typical methods of valuation like comparable sales - there is no public tax assessor's website that you can just freely grab this from. 

I have the credit, experience and the knowledge on how to underwrite the deal to show their ROI in this arrangement vs a traditional sale. 

;(- if as-is value is less then the balance on the mortgage + arears OOOPS you need to have the owner work with the bank, you as the investor buyer AND a short sales expert often an agent work the tedious and usually failing short sale process. 

This would need to be structured that if your rent is at or below your mortgage payment, the portion of the mortgage payment going towards principal is more than all other expenses (and hopefully more than budgeted capex). 

@Kezia Edmonson Yes, you can use a 1031 exchange to defer taxes on the sale of your single-family investment property when purchasing a multifamily property, but only the portion used as investment (the three rented units) qualifies.