Also, the bank wants to be first lien holder.

That cash can often times be put to a better use than sitting around in the bank. 

I exchanged messages with another (very generous and informative) investor recently about seller financing and he described it like you, with the healthy down payment and slightly higher interest rate, but I couldn't wrap my head around a buyer with $25k in their bank account who can afford a higher interest rate and slightly higher monthly payments that couldn't qualify for a traditional loan.

If I were to remodel it, in to two additional units would I need to notify the bank? 

I would also echo Thomas s.’s comment and say get the the money to work for you and don’t pay extra on those mortgages, why do the bank a favor when you can earn good money on that cash .

A house in my area, listed for about 130k, needs work, bank will/wants short sell (sale?)...

My bank won’t do loans under 50k AFTER a 25% down payment.

I'm not speaking to you as an experienced investor but I do not think the bank does not even consider the status of the current leases. 

The bank practically gave the house away .

Some will allow you to buy a duplex, but not all banks will.