They said it needs approval from city.we appreciate your thought! 

Andy Sirkin (fantastic legal team from SF) has a library of free online articles and a set of agreements to purchase, to help you on your way to become a Subject Mater Expert. https://andysirkin.com/article...Elizabeth and Christina (The Rental Girls) have done a great job pioneering the shared ownership (TIC's) model in Southern CA. 

Be sure to review the legal documents, oral representations won't stand up in court.

My concern is that if i apply for a HELOC to use for the down payment before i apply for a mortgage, A) I wont get approved due to my DTI ratio, and B) I wont get approved without first showing the bank I have the 20% down payment before pulling the HELOC.

Plus you'll want reserves for maintenance and vacancies.Have you checked what you can actually get approved for?

Do not rely on it for legal advice.

Second, there's a legal concept called "unjust enrichment."

And/or are you willing to take the risk of being sued by the seller for not performing on a legal contract (and losing your earnest money)?

If the seller accepts the offer, (contingent on appraisal[as per court approval requirement]), How should i proceed in the situation.

If you need financial help, ask under the "Finance, Tax, and Legal" forum.