The Exclusive Right to Represent makes sense for prospective individual homebuyers, but for real estate investors, it seems unfair and limiting.

If I understand correctly your siblings goals are to sell their rental properties, use the funds to purchase a primary residence they'll eventually move into, and limit their tax liability correct?

Short term, leaving financing in place during rehab prior to resale — great strategy with limited risk to either party. 

you might say something like, "I’ve been studying Austin and Denver for rental properties and have a $200,000 price limit—what are the pros and cons of both markets?"

Not the entire 700k can be offset because of the 461 limitation.

We have offered to allow her to pay a reduced rent for the first few months as well but I am worried that may create some sort of limit on how much we can raise the rent on her in the future.

Utilizing empty lot space in this way helps to combat the increasing housing prices and limited supply many markets have been experiencing.

Some hotels actually have a condo like structure, where people can own the units, but perhaps are limited on their personal use to only a certain amount of the year - the rest of the year it is in the rental pool managed by the hotel.If numerous room owners stopped paying their bills, you could get tax liens on numerous separately owned units.Hotels are a tough business, an issue I also see come up with them often is that they require refreshes, expensive and relatively often - at least once every 10 years, if not more often. 

However, what if you prefer simplicity, limited risk, and are living off of the income? 

If you were limited in cash reserves atleast you'll have the HELOC as a 2nd or 3rd back up source of funds to weather storms.