I have had major financial changes since the purchase of the dirt that prohibits me from moving forward with developing the site. 

Mortgages that are made on properties in which sales contracts have been executed after 11:59 PM, December 31, 2014, are not eligible for a waiver of the regulation prohibiting property flipping.

Furthermore, depending on the relationship of his family member that may lend on the project, he could possibly enter into a prohibited transaction.To me, a cleaner way of doing the transaction would be for you to pay cash for the property, use it for collateral, and have the IRA loan the money for the rehab in a 1st lien position.

@Karen Warren HMLs don't follow the Frank Dodd conventional disclosure and regulatory requirements, and therefore are prohibited from lending on an individual's primary residence.

The loan prohibits using the property as a rental, so I'm considering refinancing the loan and using it as my first rental, and using my cash reserves (I'm currently paying down debt and plan to save around $25K) to purchase another investment property as owner occupied, rehab it (sweat equity), and then put it up for rent as well.Is this crazy?

We are very careful to prohibit behaviors not people.We can prohibit the act of smoking on the property, or at least inside.We don't prohibit people who identify as smokers from renting with us - we just tell them they can't smoke on the premises (however we define that) and then outline what the consequences of violating that policy will be. 

A disqualified person performing such work is generally a prohibited transaction. 

Focus on the tenant who has the need, length of condition, past treatments, past housing, try to work on solutions for the tenant, not prohibiting the dog.

Cost wise i'ts not prohibitive by any means, but is it necessary? 

Since it prohibits applying rent credits to the purchase price, I'd say it is applying itself to lease option contracts in spades.And in the case of matters as important as this, I wouldn't take an article or a posting on BP as your source, my own posting included.