Lenders will look at your prior two tax returns and will use the lower number to qualify you.

I have not done any kinds of deals like this one, but with this being a financed purchase, I would think you would have to get a commercial loan where the rate/costs might be higher and the amortization possibly lower as you wouldn't be able to get a traditional residential loan (to my knowledge) on this package. 

What I understand, from your post is that you are more interested in a lower cost home that would be comfortable to live in (no work needed) so you can save money for an investment while your fiancé (congratulations!!)

You can get away with a lower down payment, easy to analyze and some renters prefer only SFs.

When I run the numbers, even when I try to cheat and assume "that cost would NEVER be that high so let's lower it..."

At the foreclosure unction, the bank has right to bid up to their judgment amount, or a lower price if they choose.

The cost of living is quite a bit lower than the US average.

There are some markets nearby with lower price points and similar rents.

Even if you go to court and lose (which I find unlikely) you would still just pay the bill which is probably lower than your insurance deductible so the only thing it really cost you is time.

This can diversify you, lower your overall portfolio risk and enhance overall returns if done correctly.