Most likely the issue is poor surface water management, failing gutters or missing downspout extensions.

@Abhishek Sahni, at the surface level, real estate investing is real estate investing.  

I didn't specifically seek out anything like 30 year amortization or non-recourse, etc, so none of that surfaced.

Or it may be surface water flowing from another lot, or surface water piling up from rain and not soaking into the soil, which may be some type of backfill they had dumped in at some point during the construction process to grade the lot higher than it was when they bought it.

Is there a driveway/patio/other solid surface near your house that would drain water toward the house?

Are there lips where there is a change the height of the surface?

Here's what the quote covers:- Conversion of 2 bedroom, 1 bath main house to 3 bedroom, 2 bath (~1040 sf footprint)- Demolition of existing walls (existing dining room wall, wall between kitchen and living, bathroom closet)- Finished Shell (Reframing opening to living room and kitchen, shifting openings for bathroom/bedroom, new walls at bathroom and dining, level - Replace all aluminum windows with fiberglass windows and screens- Upsizing plumbing, and relocating fixture locations as necessary- Upgrading electrical panels- Assume heat pump and ductless mini-split for heating and cooling- An allowance for kitchen appliances including combination range, hood, dishwasher, microwave, refrigerator, and washer/dryer- An allowance for mid-grade plumbing and lighting fixtures (Delta, Kohler, or equivalent)- Mid-grade plumbing and lighting fixtures (Delta, Kohler, or equivalent)- Ikea cabinets or equivalent with solid surface countertops, includes island- Assume solar system to be installed on the house including battery storageFor the garage ADU, the garage would need to be demoed and rebuilt, but we would benefit from building within the setback since the garage is on the property lines.

On the surface it also sounds like you have a lot of local support for managing and maintaining the property but I suspect that will kill off most of the returns.The real information is somewhat hard to come by as the developer controls much of the market, the rental management, and a lot of the previous pricing data as they didn't report to MLS for much of their history.  

Your heart will be pounding so no need to stress yourself out further. 3) A box clipboard might be useful for not only a solid writing surface but also to hold phone, calculator, or other items as you don't always have much wiggle room to rapidly put hands in pockets or handbag and back again (it's a bit of a body pack).4) Make sure you budget extra time in case you win because you'll be racing to the bank and back.5) If bank isn't within walking distance, you may want to take a rideshare or cab to the bank and back. 

I'd need to know more information to determine myself if I were assisting you (hypothetically, of course, since we aren't allowed to advertise our services through this medium), but from the surface level it does sound like you do qualify for the 121 exclusion.