Unless you see your sub-market with a lot of inventory about to hit the market or some other idiosyncratic condition looming, I wouldn't be worried.

After looking at the budget and how good of condition the house is in 2% sounds much more reasonable. 

Air conditioning (Since you are in Cali, I think you guys need air conditioning more than heat, if I am wrong then switch it around)4.

The credit score is not as important, as commercial loans evaluate the property to see if it can maintain loan payment on its own and be profitable under normal conditions. 

We are ok with, cuz hubs is a builder but would like to be compensated for condition of property.

You may have to foreclose and kick someone out of their houseThat the city will condemn the property due to its unsanitary condition that the borrower was living in, and won't release it back to you as the rightful owner until you jump through a million hoops and needlessly spend an exorbitant amount of money on their "city approved" contractors. 

Besides the loan advantage you're getting to live RENT FREE!!!

If you offer to buy it, make it conditional on the unit with the problem tenant being vacant.

If you have a real estate agent, I would ask them for comps to determine where you need to get to condition wise in order to justify a refinance to get your cash out. 

You can get a 3rd party to look over the house and give you a report about the condition of your property.