Would the potential cash flow of the ADU have an impact on the value of the property?  

.$100k can potentially be deducted as replacement debt. 

Potential Marketing StrategiesShould I directly contact insurance companies to be added to their approved rental property lists?

Overall we both would win it seems quite big, esp w interest only the cashflow would be positive. he didnt really like we are doing an appraisal as he might be thinking he can pull a fast one on us w his price tag.. again happy to overpay as i see the potential but obv not outrageously. 2) Can principal be payed down in interest only seller financing? 

Even if the rental has a decent cash flow with additional flood insurance, we're still not sure we want to take on that risk as we are out-of-state investors (planning to move back to KY in the future, but not now) and we don't like that it will potentially bring down the perceived value when we try to sell it in the future.The seller has never lived there and has not provided any information on if it has flooded before or not. 

It is cheaper then FHA mortgage insurance, and you can potentially drop it in the future without refinancing unlike FHA. 

Conducting a thorough property inspection or consulting a contractor can help identify potential large-ticket items you might need to replace soon.For make-ready costs, you can look at local averages for common turnover tasks like repainting, carpet cleaning, or minor repairs.

Are there any strategies, tips, or potential pitfalls I should be aware of as I explore this market?

You can still find positive cash flow (aka the 1% rule) and amazing appreciation potential.

One of the roadblocks weir running into is the potential tenant will keep communication and go silent once we bring up background checks.