Everyone after me will now be aware the sewer is bad and obviously demand a different sale price.

Brokers cannot demand a certain amount of EM  Only the Seller

If it's a go, then I would demand a full application (credit, background, LL refs, income/work docs) just as if you were starting a new lease.  

I don't want to discourage you from trying but to be blunt if a newbie investor asked me to partner I would only consider it if I took the lead to protect myself and I would demand a large percentage of the deal if I'm bringing any money to the table. 

I think if you demand a lot more than that, you may risk killing the deal. 

When in doubt, go with a 1/1...real 2/2 properties in my market are in less demand as rentals than the 1/1. 

Now that the lease is set up in the beginning of summer, do I demand a much higher rent increase to bring it up to market?

Probably not a wise move to spend any more than you absolutely have to in an area where average rent is only $1,000/unit as even if you can demand a 10% premium, you're only netting an additional $100 which will take years to pay off a new kitchen.

Make sure that you have a property and in a location that will have sufficient interest / demand as a short-term rental.2.

Demand a return of the keys, security deposits and other funds held, tenant files, and everything else.