When i refinanced my VA loan they called it IRRL (interest rate reduction loan), very fast process, closes in about two weeks and reduced the monthly mortgage payment about 300 per month.

My guess is they are looking at your purchase price + improvements and putting a lot of weight in that.

Get the property under contract, assuming the full payoff, and then contact the owner and attempt to negotiate the payoff price, wholesaling it based on the now reduced amount with any negotiated reduction coming back to me? 

Would you move forward with owner financing or would you put the most weight with the appraiser and stick hard and fast with the appraisal value?

The most weight will be the income approach on this property as the market will be difficult to value since it's unconventional. :)

You should have some principal reduction at this point.

A good agent is worth their weight in gold.

I like to provide a comprehensive list showing all the work that has been done on the property since I bought it.If you are using a portfolio lender with an in-house appraiser, then the appraiser may give some weight to the rent component.

The reduction in principal is about 3k and 6k, respectively.

You have to weight it out.- I'm going to send you a course by Joe Massey on "How to Build a Portfolio of 10 Denver Rental Properties" that uses a house hacking example to leverage building an entire portfolio.