On top of that, you are suggesting that the seller likely knew about the water intrusion and attempted to cover evidence of it, which may be fraud.  

I once defended a small fish (1 of 17 defendants) in a $20 million dollar mortgage fraud trial.

Assuming each half of the duplex is "identical."1- Run the half you are renting as if it was a SFR.

For example if you currently live in the nice part of town 5 minutes from work, and are buying in the hood & your commute will double, that can be a flag for occupancy fraud (the most common type of fraud), which can delay closing or prevent it entirely. 

There are many people being harmed by "buyers" putting properties under contract with no intention or ability to close. 475.43 addresses theses FRAUDS AND SCAMMERS.

Therefore, I truly hate it when BP gets screwed up by a bunch of unethical liars posting with disguised identity.

You may want to look into identity theft protection also since it sounds like you did give some personal information thinking they were legit.

A friend said that if I don't use the money from the insurance company to repair the roof it is considered insurance fraud.  

Don't risk hiding this as it would cause major complications in your future investing to get charged with mortgage fraud by the state of MN. 

Or is he just pulling off some major fraud?