@Michael Cohen,Yes there are what is known as "weighted" scores.

I think you should weight the two before making a move to sell. 

That doesn't mean there isn't a "right" price for it but if it's been on for 400 days with no price reductions you could have: 1.) an unmotivated seller, 2.) property is in a flood plain, 3.) there's issues like lead-based paint/asbestos/etc., 4.) foundation is shot, 5.) etc.  

Therein lies the grey area.ANY feedback to this is worth its weight in gold.Thanks in advance,Scott

Running a pro forma analysis on each scenario will produce a result for both structures which will allow you to compare and weight the risk/reward to you (and your friend) and make the call on which structure works best for you and him.Hope this helps clarify things for you.

If I didn't drive the mileage I do or haul the weight I do, I'd be in the cheapest used econo car I could find.

Negative amortization occurs when the payment of principle and interest does not result in the reduction of the amount owed.  

After the walk through, I felt the repair costs were going to be too high and my gut told me to pass if I couldn't get the right price reduction.

Local code and building costs are going to be a factor either way.What they need to determine when you add a "Story" to the house is if the foundation can support the extra weight.Here in New England, we have a lot of stone foundations and concern here is that they will shift under the weight, so the solution is to add pilings to support the house and assist the foundation.

If you're buying high-dollar properties in Los Angeles, San Francisco, etc. you shouldn't underestimate the huge impact that 'only" a 2% reduction in a 30 year mortgage can have on cash-flow.