My question is about 1031 exchange.Since we purchased as FHA owner occupy, we must reside in this residence for 2 of the next 5 years to fulfill our lender requirements.

It's definitely fair to pay for materials up front, because that will probably be an up front cost to his company as well, but I'd suggest withholding a fair amount of the payment until the job is done.Anytime any sort of contractor and owner set up a contract each side has leverage on the other to make sure the other side fulfills the contract on their end. 

For fulfillment you can do it yourself to save money if you are broke, but ultimately if you want better response rates and focusing your time on value-add, then you will want to outsource fulfillment to a shop that has economies of scale and can offer you great rates.

The times I choose fulfillment over $$$$ left me kicking myself after 6 months.

Even if the Zestimate may not be all that accurate, because it is viewed so often by buyers, it can be kind of 'self-fulfilling' by the laymen tire kickers out there. 

Don't enter into contracts with no guarantee that you can fulfill your obligations. 

Just wanted to add that, should you decide to work with him, you may want to read the Virginia landlord tenant law about giving written notice that you'll accept any partial payments "with reservation" of your rights to evict if he does not fulfill his obligation.     

this is a typical Utah based fulfillment company.. 

Also, insurance wise, the buyer will still pay, but I will be there first beneficiary in the case of a claim until the contact is fulfilled, and that will cause me to receive all copies of insurance bills, changes to policy, etc.

, well no but it will greatly improve your success rate. yes you can do seller financing but most of them would want to see your credit report and will most likely not give you favorable rates. seller financing is harder to come by these days as it is mostly due to cash buyers. can you do a rent to own or a sublet lease, sure you can. but again, most will want to see a credit report before leasing, at least that's how it is in NYC. no one on here is trying to discourage you from fulfilling your dreams and no one is trying to give you an easy answer. were all here to share our thoughts an opinions to benefit one another.