Unfortunately I did not word my rental agreement modification carefully enough.

If 2nd lien wasn't released then it has priority over all other liens recorded after 2nd lien.If the third lien references the 1st lien as an extension (or modification), then it is very likely that either someone made a mistake releasing first mortgage or they released 2nd mortgage.I am sure title co can help you out decipher this 

She needs to attempt a loan modification if she wants to keep or sell via short sale.

I can make modifications &/or improvements to it.

Are there any modifications to the written lease?

The drawbacks are that repairs/modifications are expensive due to the house’s age and that I have to clear everything through a historical society as a result.

Was your 2nd mortgage properly recorded at the time of the modification? 

After I read BK filing by Original owner I noted modification of original first mortgage 6 years after "recorded quitclaim deed" to another party who had not assumed the loan nor notified first mortgage lender of transfer of ownership.

I would like to crowdsource some opinions on if I may have damaged the long term rental appeal of this townhouse with some of the modifications I made to make it semi-house hacked:- Bought an undervalued 4bed/3ba TH in need of cosmetic renovations.- Built two walls/doors separating first floor from second floor and installed a washer/dryer in one of the third floor bedrooms during renovations. - Roommate rents out bottom floor while I live on the top two floors.- The ROI on house hack reno is 100% (will recoup all costs within the first year)- Concerned that this semi-split set up  may not be very appealing to future renters once I move out in 5-6yrs and rent it out- It looks fine cosmetically but closing off these levels makes the house feel somewhat less open.- Located in suburban area.Tearing down two walls and removing the upstairs w/d would not be very expensive so if it would be worth it to do this prior to moving out, it is something I would consider.

You sign an agreement with them (workout agreement, loan modification, forbearance agreement) that spells out the details.