In the event of the short sale the property is being conveyed in full by the homeowner to you the buyer just like any other sale.

@Dion: I don't think my words on this post are conveying my thought process very well.

It always amazes me how many buyers ask for it to convey as they think it's custom. http://www.walmart.com/ip/Marjorie-Voile-Scarf-White/3861742

If you just do wrap sales and convey title it will be a whole lot easier.

Since the seller did not convey the property free and clear of all liens and encumbrances, my guess is that the undoing of the transaction is in order.

If lower -- say 10% -- then you would be looking at a value close to 270k.Your real profit, of course, is the difference between what you can sell it for after re-hab (net costs of sale such as commission, legal fees, conveyance tax and also cap gain tax) less what you have into it -- purchase price, rehab costs, and all carrying costs during re-hab (such as mortgage interest, prop tax, insurance).

I used the term "inherited" as a shortcut as I didn't realize the method of conveyance mattered too much.

As you correctly pointed out (Original Seller) conveyed a portion of the property that was insured namely the southerly 11 feet of Lot 4 to (current neighbor) prior to the recording of your Deed (FATICO did not insure the East 10 feet of the closed alley and is therefore not included in this claim).

Why not be upfront, lease it and have the tenant guarantee the note and convey upon the payoff of thier loan?

Use the name you got from the county tax site (I often print the sheet out, take it down to the recorder's office and use it to jot down important notes about mortgages and other liens against the property) to see if the property was conveyed to a new owner (the county tax site doesn't always post the most recent ownership info - they can sometimes be months behind).