Based on the info you provided it sounds like something that should be likely; however, the City is not just going to allow this program to legalize pre-existing illegal units; they will definitely still require a building permit and inspections, which means opening up walls to show how work has been completed, and upgrading all work which does not meet current code compliance...

There is no "right" answer to whether you should hire a general contractor (GC) or manage the project yourself, albeit your local municipality may require a CSL/GC oversee the project given it's a multi-family dwelling.Getting into non-owner occupied condo project of that size can easily overrun your construction timeline (especially if you don't have a pre-existing GC relationship) and as you point out those holding costs will add up quickly.

No harm in asking the tenant to clean and otherwise make repairs, but, honestly, you have no basis to withhold if the tenant claims that the damage pre-existed him/her or that the property was in even worse condition when he/she moved in. 

If it was pre existing, then any demo would be the owner responsibility....in addition to him now changing the property you leased, making it less usable.  

After that, buy a small multifamily (preferably a fourplex with some pre-existing tenants), and also have a roommate lined up for when you move in.

Just natural regrowth of Loblolly pines and assorted pre existing hardwoods.

I which case youd have to look at the value of the the land plus pre existing permits which could come to more than your purchase price.  

A lot depends on your appraiser/lender.I wouldn't necessarily worry about rent control issues, only to the extent that the city may attempt to convince you to keep your pre-existing tenants for longer than you'd like when you move in (your old tenants may call the mayor and/or city when they figure out you are raising the rent, and the mayor/city is very proactive about trying to help tenants in need, etc.).

If you're dropping it on a pre-existing foundation and self-GCing the lot prep, it's even cheaper.

I don't know if Drylok would bond with a preexisting coat of paint on it.