Bougie snobbie places like that probably have a LOT of rules about exteriors which is what all of your violations are related to. 

They should have to stick within the rules for zoning and other city ordinances and what not. 

Quick hypothetical in case that the last paragraph didn't make sense:Purchase property at 50kIt rents for $1000/moIt cash flows $300/moSell it for 75k because it's appreciatedNet a 25k profit(we wouldn't actually, with commissions, closings, taxes etc, but I'm keeping this simple)Now we can put 25% down on a 100k propertyIt will gross $2000/mo(2% rule)Now we net $600/mo cash flow.Our cash flow has doubled because of the snowballing!

This lender says is is a fannie mae rule. 

if so, was it longer than the 2 year rule to exclude capital gains?

You should also investigate if there have been changes in laws or zoning that the current property is grandfathered into that would pose restrictions on a new construction.  

If you have some rules of thumb and general guidance to go by, that would help!

I have analyzed over 25 deals using the 50% rule and quite frankly I thought finding a good deal was going to be easier in this market.

Obviously this is not a hard and fast rule and each area is different but think about this.

Looking at the numbers CAPEX and repairs add a huge amount to the monthly expenses.For instance, this third deal:Monthly Income: $1,100Monthly Expenses $1,134.14Monthly Cashflow: -$34.14Pro Forma Cap: 5.22%NOI: $5,215Total Cash Needed: $11,050Cash on Cash ROI: -3.71%Purchase Cap Rate: $5.73Sale Price: $91,000Closing Costs: $2,500Renovation Costs: $4,550 (5%)TOTAL PROJECT COSTS: $98,050Down Payment: $4,550 (5%)Loan Amount: $87,314.5Loan Points: $864.5 (1%)Amortized: 30 yearsInterest Rate: 5%P&I: 468.72Total Cash Needed: $11,050Property Taxes: $2,184/yr2% Rule: 1.13%Initial Equity: $12,685.50Gross Rent Multiplier: 6.89Debt Coverage Ratio: 0.93Expense Increase: 4%/yrIncome Increase: 5%/yrProperty Value Increase: 4%/yrCash on Cash ROI: YR1 (-3.71%) YR2 (-0.63%) YR5 (2.64%) YR10 (9.76%) YR15 (31.56%)Annualized Total Return: YR1 (2.48%) YR2 (22.27%) YR5 (26.37%) YR10 (26.47%) YR15 (22.20%)Total Profit if sold: YR1 ($274) YR2 ($5,469) YR5 ($11,251) YR10 ($24,701) YR15 ($70,982)Expenses:HOA: $82Insurance: $66Taxes: $182MTG: $468.72 (@5%)TOTAL: $798.72Vacancy: $110 (10%)CAPEX: $190/mo (~2.5%)Repairs & Maint: $380/mo (5%)TOTAL EXPENSES: $1,478.72These expenses are different than the $1,134.14 mentioned early on.