I've seen these situations spiral out of control and lead to occupants neglecting/damaging the property, such as making holes in the wall to look for hidden cameras, nailing doors and windows shut, etc.

There will be some holes in the wall where they open it up to let air in and dry it out.

Another problem I see is investors using 8% for PM fee when buying in crap hole areas where a specialized PM there goes for 12 to 14%.

I am entering escrow tomorrow and although I have reviewed all the various data from this property I am still "inexperienced" and we all know that although a buyer's agent has a fiduciary they are still going to have a monetary agenda so if something might be on the fence they will shine a positive light on it.

It also took me down the rabbit hole of the safety of escrow deposits which seems quite frightening.

I had one friend who tried this and finally went to go visit the property and it had holes in the walls etc that the contractor never fixed but they did not know it until they visited

Like @William Collins said, there are opportunities out there but if you are too excited, you will overpay and then be stuck digging yourself out of the hole. 

We know we could apply for a zoning change, but that process could/would take months and we are beyond ready to move onto our next investment.Has anyone else come across problems like this, where the lender is going down a rabbit hole and denying funds because of something that could possibly happen in the future?

Just build a new property, knock some holes in the walls and urinate in the corner.

Apart from many holes in the walls, the tenant had put screws into all the window frames some of which went all the way through to the outside.