Current condition: inside is about 80% gutted, has an illegal addition attached to it that is probably cheaper to tear down (it's in really poor shape and not built well) and rebuild than make legal, has a finished basement unit with kitchen but it's illegal, city wants it returned to basement/storage.  

Another was (and probably not applicable in your case) more of a developer/flipper - tear down rebuild. 

Eventually I think you could demo them and rebuild with better looking, more efficient space.

My question is this, so much time has passed with little repair if any on the house, from the street it looks like a skid row home....if I'm able to convince the owner to let it go at what point do I draw the line between rehab vs total tear down and rebuild?

We will be hiring someone to rebuild our back porch.

I own a triplex that is grandfathered in under current zoning- meaning that it's OK to continue operating as it's been, but if I were to scrape the lot and rebuild I could not put three units on it.

I would keep the existing structure, they lots are not big enough to rebuild 2 structures.

The current rebuild cost estimate on the house is $311,000 which is higher than coverage is even available from the NFIP. 

Here in CT the sale price of a property often exceeds the rebuilding value of the building due to the value of the land. 

Even cash Buyers have some common sense and have to recognize that, unless they are tearing it down to do a rebuild, that somewhere along the way their capital is at risk and would not get involved in it.If I were you, I'd just say I can't help you with this one and move on.To answer your question though, if it is zoned as a SFR, if it has a CO as a SFR, appraises as a SFR, has a utility set-up as a SFR, then one should value based on the Sales Comparable Approach and not an Income Approach.