Look at the quality of work that was done and barring issues, I wouldn't let that prevent me from buying the property.As far as the 1% rule, think of it more as a guideline or quick measure.

To best avoid the cash-killing "Capital Expenditures" you have to pick the right type of house, find the right tenant, and take other pre-leasing measures that will reduce your long run turn costs.

Cap rate is just a snapshot in time and doesn't take into account the longer terms benefits and risks. it is only a  measure of current cash flow. 

@Saikat Bhadra - A good plan of action is to tour the property and measure the height yourself, view other properties in the neighborhood and see what has been allowed in the past, talk to the city about what you want to do to see what is allowed for the house and speak with a few contractors and architects that work in the city to get their ideas and ballpark cost estimates.

And 36 Other Key Financial Measures by Frank Gallinelli 2.  

Small and midsize multi families are usually valued on a dollar per unit basis and can also be measured by "cap rate".

In construction we have a saying "measure twice, cut once".

I still allowed him to measure the home so I could see what his quote would come back as and he still has not sent it to me.  

They have no basis or way to measure it.

Now, I haven't figured out how I am going to measure this.