For the REOs that need a lot of work, where the previous owner "reconfigured" the layout of the house, they are pricing the house extremely low, at start, then selling to the strongest buyer.

Someone else might consider that number great if they are in a tight market and all they do is lay out some money and watch everyone else scurry about. 

By all means, give back, use your intuition about a tenant, and the first time the property is wrecked and you have a $3-5k bill to put the house back together again, you'll realize that giving back is not a good way to go.Been there, done that.It all comes back to screening.

Again I'm working on an identical layout house across the street, that just appraised at $105,000. 

The layout of the two smaller bedrooms has one captive (meaning you can only access bedroom #3 by walking through bedroom #2).I thought about adding a 1/2 bath on the second floor and combining bedrooms 2 & 3 and had a contractor suggest leaving it as-is and calling bedroom #3 a nursery/office.

You may need to develop additional funding sources and take on larger rehab projects, higher price points and (.atvleast for me) target deals where you can force appreciate by adding square footage, increasing bed or bath counts, and reconfiguring layouts.

We would love to hear thoughts from anyone and everyone, but obviously thoughts from those who have done something similar or have investing/rehab experience in this part of the country would be greatly appreciated.If we were to go forward with this plan, we would of course need a contractor, but we also think it might make sense to hire what we called a “rehab consultant” – someone we could hire on a fixed fee basis to help us choose specific countertop materials and designs, appliances, and bathroom rehab layout.

I'll take a lower cap rate because I want a newer build, to postpone capex expenses, to get a more modern layout, and generally ensure that I can have full occupancy.

Well forget the Electric heat, agree with @Max Tanenbaum on that, it will make it tougher for you to rent. you can look into as @Anthony Nguyen said, wall units that do both heat and a/c, depending on the size and layout of each unit. you can do forced air, one in the attic and one in the basement. or remove the old and install two smaller units and run hot water baseboard heat to each unit.

Your parcel is a triangle shape, which doesn't do you any favors for a parking lot layout.